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
-Firms in monopolistically competitive markets spend significant sums on product differentiation because:
A)it enables them to earn positive profits in the short run.
B)it increases the elasticity of demand for a firm's product.
C)it reduces the number of competitors.
D)it causes the firm's supply curve to become horizontal so the firm can expand output indefinitely.
E)it causes the firm's demand curve to become horizontal so that it can charge a fixed price for its product.

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
-Firms in monopolistically competitive markets spend significant sums on product differentiation because:
A)it enables them to earn positive profits in the short run. 
B)it increases the elasticity of demand for a firm's product. 
C)it reduces the number of competitors. 
D)it causes the firm's supply curve to become horizontal so the firm can expand output indefinitely. 
E)it causes the firm's demand curve to become horizontal so that it can charge a fixed price for its product.

Quizplus · Accepted Answer

Product differentiation in monopolistically competitive markets allows firms to distinguish their products from those of competitors, creating a unique market niche and enabling them to earn positive profits in the short run by attracting customers who prefer their specific product variant.

The Figure Given Below Shows the Revenue and Cost Curves