Question

multiple choice question
why do firms engage in product differentiation if it adds to the firms costs?
increased differentiation may increase demand enough to compensate for the added costs.
increased differentiation prevents competitors from achieving a normal profit.
increased differentiation leads to a decrease in excess capacity for the firm.
increased differentiation increases productive efficiency.

Explanation:

Firms engage in product - differentiation to attract more customers. If the increase in demand due to differentiation is large enough, it can offset the additional costs incurred. The other options are not the main reasons for product - differentiation despite cost increases. Preventing competitors from achieving normal profit is not the primary goal. Differentiation doesn't necessarily decrease excess capacity or increase productive efficiency as its main purpose.

Answer:

Increased differentiation may increase demand enough to compensate for the added costs.