Question

Briefly explain the implication of the following:

Selling cost under monopolistic competition

Answer 1

Selling costs (advertising, salesmanship, retailer allowances, etc.) are a key part of monopolistic competition: by differentiating a product and shifting the demand curve outward they raise both demand and a firm’s composite (production + selling) cost, so firms will increase expenditure on selling only up to the point where the extra revenue generated equals the extra selling cost. Selling costs therefore enable non‑price competition and partial price‑making power, can raise per‑unit costs (average selling cost is typically U‑shaped) and,if effective,increase profits, but they also push equilibrium prices and costs higher and are profitable only while marginal gains exceed marginal selling outlays.