As new firms enter the market, a monopolistically competitive firm can maintain profits by
A. discovering new ways of differentiating its product. B. securing tax breaks and/or subsidies from government. C. finding new ways of lowering the cost of producing its product. D. All of the above. E. A and C only.
The correct answer and explanation is:
The correct answer is E. A and C only.
In monopolistic competition, firms differentiate their products to maintain market power. As new firms enter the market, these firms face increased competition, which tends to reduce their ability to maintain high profits in the long run. However, there are still ways for these firms to keep profits up.
A. Discovering new ways of differentiating its product is crucial. Product differentiation is a key feature of monopolistic competition. Firms in this type of market sell similar but not identical products. By innovating or creating new features, a firm can make its product stand out from competitors. This differentiation can take many forms, including better quality, improved customer service, branding, or unique features. As a result, customers may be willing to pay a premium for the product, helping the firm maintain profits even with competition.
C. Finding new ways of lowering the cost of producing its product is another effective strategy. If a firm can reduce its production costs while maintaining product quality, it can preserve or increase its profit margins. Cost-reduction strategies can include improving operational efficiency, utilizing economies of scale, or innovating production methods. By lowering costs, a firm can remain competitive in pricing while still earning a profit, even in the face of increased competition.
B. Securing tax breaks and/or subsidies from the government is not a typical strategy for firms in monopolistic competition to maintain profits. Government support, such as tax breaks or subsidies, might be available in certain cases, but it is not a reliable or long-term strategy for a firm operating in a competitive market. Relying on government assistance is not sustainable in the long run, and it is not a typical method for firms in monopolistic competition to maintain profits.
Therefore, the correct approach for monopolistically competitive firms to maintain profits would focus on product differentiation and cost reduction.