Multiple Choice
Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
A monopolistically competitive industry is like a purely competitive industry in that:
A
products are identical across all firms.
B
each firm is a price taker.
C
firms can freely enter and exit the market in the long run.
D
there are significant barriers to entry.
Verified step by step guidance1
Understand the characteristics of a monopolistically competitive industry: many firms, product differentiation, and free entry and exit in the long run.
Recall the characteristics of a purely competitive (perfectly competitive) industry: many firms, identical products, price-taking behavior, and free entry and exit in the long run.
Compare the two market structures to identify similarities: both allow free entry and exit of firms in the long run, which ensures zero economic profit in equilibrium.
Note the differences: monopolistic competition features differentiated products and some price-setting power, while perfect competition has identical products and firms are price takers.
Conclude that the key similarity is the freedom of entry and exit in the long run, which affects the long-run equilibrium outcomes in both market structures.
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