Question

Show a firm that begins in a perfectly competitive industry, earning no economic profit nor economic...

Show a firm that begins in a perfectly competitive industry, earning no economic profit nor economic loss. Then, assume the firm can differentiate its product in a way that makes the product more attractive to consumers, so the firm then has market power. Show the new equilibrium, where this firm is maximizing profit, assuming the firm is now earning an economic profit. Use this analysis to explain why it is reasonable for firms to try to differentiate their product from their competitors.

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Answer #1

Here initially firm is operating in the perfectly competitive market structure and demand for an individual firm is horizontal. The firm is price taker and does not earn the positive profits.

After introducing the differentiated product, now firm no longer exists in the perfectly competitive market structure.

Thus now firm has entered the monopolistically competitive market. Now demand curve slopes downward giving some leeway to firm with respect to price determination.

Following is the diagram:

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