In monopolistic competition, the goal of product differentiation and advertising is to make:

• A. the firm's marginal cost curve shift downward, reducing production costs
• B. the firm's average total cost curve flatter, leading to lower average costs at all output levels
• C. the market supply curve steeper, increasing overall market prices
• D. the firm's demand curve more inelastic, allowing it to raise prices without losing many customers

Answer: (D)

Verified step by step guidance

1. Understand the nature of monopolistic competition, where many firms sell differentiated products, giving each firm some market power to set prices above marginal cost.
2. Recognize that product differentiation and advertising aim to make the firm's product appear unique or more desirable compared to competitors' products.
3. Recall that when a firm's product is more differentiated, consumers become less sensitive to price changes, meaning the demand curve facing the firm becomes more inelastic.
4. Note that a more inelastic demand curve allows the firm to increase prices without losing a significant number of customers, thereby potentially increasing profits.
5. Conclude that the goal of product differentiation and advertising in monopolistic competition is to make the firm's demand curve more inelastic, not to shift cost curves or affect the market supply curve.