When firms in an industry produce differentiated products,
A)long-run economic profit will always be zero
B)short-run economic profit will always be positive
C)the demand curves facing firms will always be perfectly elastic
D)the demand curves facing firms will always be downward-sloping
E)new firms will always have an incentive to enter the industry in the long run

Question

Quizplus · Accepted Answer

When firms in an industry produce differentiated products, the demand curves facing firms will always be downward-sloping. This is because each firm's product is different enough from their competitors that consumers may be willing to pay different prices for each firm's product. As a result, firms have some degree of market power and can charge slightly higher prices than their marginal costs, resulting in a downward-sloping demand curve. However, the long-run economic profit may not always be zero, as firms can still earn positive economic profit if their product differentiation is strong enough to maintain their market power and prevent new firms from entering the industry.

When Firms in an Industry Produce Differentiated Products