Multiple Choice
In monopolistic competition, in which way do producers typically try to differentiate themselves from their competitors?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
The demand curve faced by a monopolistically competitive firm is:
A
perfectly inelastic, meaning quantity demanded does not change with price
B
upward sloping, showing that higher prices lead to higher quantity demanded
C
perfectly elastic, indicating no control over price
D
downward sloping, reflecting some market power over price
Verified step by step guidance1
Understand the nature of the demand curve for a monopolistically competitive firm: it is not perfectly inelastic, upward sloping, or perfectly elastic.
Recall that a monopolistically competitive firm faces a downward sloping demand curve because it sells a differentiated product and has some control over its price.
Recognize that the downward slope means that as the firm raises its price, the quantity demanded decreases, but not to zero, reflecting some market power.
Contrast this with perfect competition, where the demand curve is perfectly elastic, meaning the firm is a price taker with no control over price.
Conclude that the correct description of the demand curve for a monopolistically competitive firm is downward sloping, reflecting some market power over price.
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