Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It allows firms to charge a higher price than marginal cost.
B
It eliminates the need for advertising.
C
It leads to a decrease in consumer choices.
D
It restricts entry of new firms into the market.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistic competition market, many firms sell similar but not identical products. This is called product differentiation, and it allows firms to attract customers by offering unique features, quality, or branding. Because each firm has a slightly different product, they can set their own prices rather than being forced to accept the market price. For example, if one coffee shop offers organic coffee while another does not, the first shop can charge higher prices because some customers prefer organic. This ability to differentiate helps firms maximize profits by creating a loyal customer base willing to pay more for what they perceive as a better option.
Detailed Explanation
When products are different, firms can charge more than what it costs to make them. Other options are incorrect because Some might think that if products are different, advertising isn't needed; It may seem that more product differences mean fewer choices.
Key Concepts
product differentiation
profit maximization
Topic
Market Structures in Economics
Difficulty
medium level question
Cognitive Level
understand
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