Entry into a market characterized by monopolistic competition

Question

Quizplus · Accepted Answer

Entry into a market characterized by monopolistic competition is frequent because barriers to entry are low. This means that new firms can easily enter the market, causing competition to increase and existing firms to adjust their prices and products accordingly. This ultimately leads to a more competitive market with lower profits for firms. While firms in monopolistic competition do have some market power, it is not enough to prevent new firms from entering. Option A is incorrect because firms in monopolistic competition do not have significant market power, and option C is incorrect because entry into the market is not based on the position of a firm's demand curve relative to its long-run average cost curve.

Entry into a Market Characterized by Monopolistic Competition