The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Which of the following is true of product differentiation?
A)Product differentiation is the first order derivative of the production function.
B)Product differentiation exists only when the products are actually different from each other.
C)Product differentiation exists when consumers perceive the products to be different.
D)Product differentiation exists when producers perceive the products to be different.
E)Product differentiation exists when similar goods are sold in geographically segregated markets.

Question

The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
  MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Which of the following is true of product differentiation?
A)Product differentiation is the first order derivative of the production function. 
B)Product differentiation exists only when the products are actually different from each other. 
C)Product differentiation exists when consumers perceive the products to be different. 
D)Product differentiation exists when producers perceive the products to be different. 
E)Product differentiation exists when similar goods are sold in geographically segregated markets.

Quizplus · Accepted Answer

Product differentiation exists when consumers perceive the products to be different. This means that even if the products are actually similar in terms of their physical characteristics, branding, packaging, advertising, and other factors can create a perception of differences among consumers. This allows firms to charge a higher price and earn economic profit in the short run, but eventually, other firms will enter the market and compete away the profit. In monopolistic competition, firms try to differentiate their products to create a degree of market power and avoid price competition.

The Figure Given Below Shows the Revenue and Cost Curves