The product-variety externality arises in monopolistically competitive markets because
A)firms produce with excess capacity.
B)firms try to differentiate their products.
C)firms would like to produce homogeneous products, but the large number of firms prohibits it.
D)entry and exit is restricted.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms try to differentiate their products to make them more appealing to consumers compared to their rivals. This creates a product-variety externality, as consumers benefit from having more choices, but firms do not take into account the positive impact of their product differentiation on the market as a whole. Therefore, the product-variety externality arises because of the desire of firms to differentiate their products.

The Product-Variety Externality Arises in Monopolistically Competitive Markets Because