The quick-serve restaurant (QSR) business has many features of monopolistic competition. Indeed, the owner of a typical McDonald's franchise competes not only against Hungry Jacks, Oporto, and KFC but against several other establishments of varying sizes. While each of these restaurants offers quick meals at affordable prices, market participants actively attempt to different their products to command market power.

In recent years, McDonald's introduced its McCafe brand to further differentiate its product, hoping to increase its own demand by attracting customers away from traditional coffee shops and other fast-food joints. In fact, the company has seen a steady increase in revenues over the years, especially during slack morning hours.

i) List three conditions for monopolistic competition. What is the key difference between the models of monopolistic competition and perfect competition?

ii) What will be the likely impact of product differentiation (McCafe) introduced by McDonald's in the short run and the long run? Explain why?