A monopolistic competitive firm differentiates its product (from similar products)in the minds of the buying public. As a result, the firm
A)may earn positive economic profits, even with easy entry into the industry.
B)will definitely earn positive economic profits.
C)will be able to lower its costs below that of its competitors.
D)finds that its fixed costs are sunk costs.

Question

Quizplus · Accepted Answer

By differentiating its product, the firm is able to create a perceived uniqueness in the minds of consumers, which allows them to raise prices and earn positive economic profits in the short run. However, because entry is easy in a monopolistically competitive market, other firms can easily mimic or improve upon the differentiated product, reducing the firm's market power and potential profits in the long run. Therefore, the firm may earn positive economic profits, but not definitely. The firm may also find it difficult to lower costs below that of competitors because they are producing a differentiated product. Finally, fixed costs are sunk costs for any firm, regardless of market structure.

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