In monopolistic competition,product differentiation causes
A)the firms to earn economic profits in the long run
B)a horizontal demand curve for each firm's output
C)the firms to operate with excess capacity
D)significant barriers to entry
E)high concentration ratios

Question

Quizplus · Accepted Answer

Product differentiation in monopolistic competition causes each firm to have a degree of market power, leading to a downward-sloping demand curve for its product. As a result, the firm operates with excess capacity- producing less than it would in perfect competition- in a bid to maintain pricing power. This leads to higher costs per unit due to underutilization of fixed inputs and makes it difficult for firms to earn economic profits in the long run. However, entry barriers are relatively low in monopolistic competition, and concentration ratios tend to be low.

In Monopolistic Competition,product Differentiation Causes