Restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.

Qa. Why and how important is product differentiation for firms operating in monopolistic competition? How do these firms set price and output to maximise profits?

Answer:

Qb. Can a monopolistic competitive market structure lead to economic profits in the long run? Use an appropriate diagram to clearly explain your answer?

Answer and Graph: