question archive The greater the product differentiation between monopolistic competitive firms, a) the higher the average variable costs
The greater the product differentiation between monopolistic competitive firms, a) the higher the average variable costs
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The greater the product differentiation between monopolistic competitive firms,
a) the higher the average variable costs.
b) the lower the price elasticity of demand.
c) the lower the barriers to entry.
d) the greater the price elasticity of demand.
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The correct answer to the given question is option b) the lower the price elasticity of demand.
Among monopolistic competitive firms, if the product differentiation is high then customers will not switch from one product to another in case of changes in the price of a given product. Hence, the percentage change in quantity demanded will be very low for the unit percentage change in the price of a product. This will make the magnitude of the coefficient of price elasticity of demand less than 1 or in other words, the demand for a given product will be inelastic.
