What will happen when a firm raises the price of a differentiated product in an imperfectly competitive market?
A) It will see lower sales but will not lose all its sales.
B) It will lose all its sales to competitor firms.
C) It will actually get new customers from other firms.
D) It will see an increase in revenues.

Question

Quizplus · Accepted Answer

In an imperfectly competitive market, a firm has some market power to raise the price of its differentiated product. However, if the firm raises the price too much, it may lose some sales to competitor firms that offer similar products at lower prices. However, because the firm's product is differentiated, some customers may still be willing to pay the higher price for the firm's product, and the firm may not lose all its sales. Therefore, choice A is the best answer. Choice B is incorrect because it assumes that customers have no loyalty to the firm's differentiated product. Choice C is also incorrect because it assumes that the firm's product is so highly differentiated that it can attract customers from other firms solely by raising its price. Choice D is incorrect because it assumes that the increase in price will lead to a proportional increase in demand, which is unlikely in an imperfectly competitive market.

What Will Happen When a Firm Raises the Price of a Differentiated