Multiple Choice
In which market structure are products similar but differentiated, for example through branding or quality?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
A monopolistically competitive firm has a:
A
horizontal marginal revenue curve
B
downward-sloping demand curve due to product differentiation
C
perfectly elastic demand curve like a firm in perfect competition
D
single product with no close substitutes
Verified step by step guidance1
Step 1: Understand the characteristics of a monopolistically competitive firm. Such a firm sells products that are differentiated from one another, meaning each firm's product is slightly different from its competitors'.
Step 2: Recognize that because of product differentiation, the demand curve faced by a monopolistically competitive firm is downward sloping. This means the firm can raise its price without losing all its customers, unlike in perfect competition.
Step 3: Recall that a horizontal marginal revenue (MR) curve implies a perfectly elastic demand curve, which is characteristic of a perfectly competitive firm, not a monopolistically competitive one.
Step 4: Note that a perfectly elastic demand curve means the firm is a price taker, which contradicts the product differentiation in monopolistic competition where firms have some price-setting power.
Step 5: Conclude that the correct description for a monopolistically competitive firm is that it has a downward-sloping demand curve due to product differentiation, rather than a horizontal MR curve or perfectly elastic demand.
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