Each firm in a monopolistically competitive industry sells a slightly differentiated product. What does this tell us about each firm's demand curve?
A) It will be perfectly elastic.
B) It will be perfectly inelastic.
C) It will be relatively elastic.
D) It will be relatively inelastic.

Question

Quizplus · Accepted Answer

In a monopolistically competitive industry, firms sell differentiated products. This means that each firm has some degree of market power, but not enough to ignore the competition entirely. Consumers have some choice between similar products, so firms cannot set high prices without losing customers to competitors. As a result, each firm's demand curve will be relatively elastic, meaning that a small change in price will lead to a larger change in the quantity demanded. However, the demand curve will not be perfectly elastic because consumers are not perfectly responsive to price changes and may still be willing to pay a higher price for a product they perceive as having unique features or benefits.

Each Firm in a Monopolistically Competitive Industry Sells a Slightly