Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A firm raises its prices significantly above the average total cost due to brand loyalty, resulting in a decrease in demand.
B
A firm lowers its prices to match competitors, causing a loss in perceived product quality and brand identity.
C
A firm introduces a new feature to its product and maintains higher prices, successfully attracting more customers despite rivalry.
D
A firm eliminates its unique features to reduce production costs, leading to increased market share but diminished pricing power.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, businesses sell similar but slightly different products, which is called product differentiation. This means that each company can set its own prices based on how unique its product is compared to others. For example, if a coffee shop offers a special blend of coffee that no other shop has, it can charge a higher price because customers may be willing to pay more for that unique taste. However, if too many other coffee shops start offering similar blends, the original shop may need to lower its prices to stay competitive. Therefore, product differentiation allows businesses to influence their pricing strategies, but they must also be aware of their competitors and how similar their offerings are.
Detailed Explanation
When a firm adds a new feature, it makes its product stand out. Other options are incorrect because This option suggests that raising prices leads to less demand; Lowering prices to match others can make a product seem less valuable.
Key Concepts
Monopolistic Competition
Pricing Power
Product Differentiation
Topic
Monopolistic Competition Analysis
Difficulty
hard level question
Cognitive Level
understand
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