Multiple Choice
Monopolistically competitive markets are characterized by which of the following features?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
Because there are many firms in monopolistic competition markets, which of the following is most likely to occur?
A
Products offered by different firms are identical and perfectly substitutable.
B
There are significant barriers to entry that prevent new firms from entering the market.
C
Firms are price takers and cannot influence market prices.
D
Each firm faces a relatively elastic demand curve due to the availability of close substitutes.
Verified step by step guidance1
Understand the characteristics of monopolistic competition: many firms, differentiated products, and free entry and exit in the long run.
Recognize that in monopolistic competition, products are similar but not identical, so firms have some degree of market power.
Recall that because products are differentiated, each firm faces a downward-sloping demand curve, but it is relatively elastic due to the presence of close substitutes.
Note that significant barriers to entry are not typical in monopolistic competition; firms can enter and exit freely.
Conclude that firms are not price takers (unlike perfect competition) because they can influence prices to some extent, but the demand they face is elastic because consumers can switch to close substitutes.
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