A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i)
They both face downward-sloping demand curves.
(ii)
They both charge a price that exceeds marginal cost.
(iii)
Free entry and exit determines the long-run equilibrium.

Question

Quizplus · Accepted Answer

Option (i) is correct because both monopolies and monopolistically competitive firms face downward-sloping demand curves.
Option (ii) is correct because both monopolies and monopolistically competitive firms charge a price that exceeds marginal cost in order to maximize their profits.
Option (iii) is incorrect for monopolies as they do not allow free entry and exit. However, it is correct for monopolistically competitive firms since there are no barriers to entry or exit in the long run, which means that economic profits are driven to zero. Therefore, the correct options are (i) and (ii) only.

A Firm in a Monopolistically Competitive Market Is Similar to a Monopoly