A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from
A) a relatively large number of firms, and the monopolistic element from product differentiation.
B) product differentiation, and the monopolistic element from high entry barriers.
C) a perfectly elastic demand curve, and the monopolistic element from low entry barriers.
D) a highly inelastic demand curve, and the monopolistic element from advertising and product promotion.

Question

Quizplus · Accepted Answer

A monopolistically competitive industry is characterized by a blend of competitive and monopolistic features. The competitive element in such an industry arises from the presence of a relatively large number of firms. This means that while each firm has some market power due to product differentiation, the presence of many firms ensures that each has a limited degree of control over the market, as consumers can choose from many alternatives.
On the other hand, the monopolistic element comes from product differentiation. Each firm differentiates its product from those of its competitors through various means such as branding, quality variations, features, and other selling points. This differentiation gives each firm a degree of market power because it can attract a group of loyal customers who prefer its unique product over others. This allows firms to have some control over the price they charge, as their products are not perfect substitutes for one another.
Therefore, the correct statement is:
A) a relatively large number of firms, and the monopolistic element from product differentiation.
The other options are incorrect because:
B) High entry barriers are not a typical characteristic of monopolistic competition; rather, entry barriers are relatively low, allowing for the large number of firms in the industry.
C) A perfectly elastic demand curve is not a feature of monopolistic competition. Firms face downward-sloping demand curves due to product differentiation, which gives them some price-setting power.
D) While advertising and product promotion contribute to product differentiation, they are not the sole source of the monopolistic element. Moreover, the demand curve for individual firms in monopolistic competition is not highly inelastic; it is downward-sloping and somewhat elastic due to the availability of close substitutes.

A Monopolistically Competitive Industry Combines Elements of Both Competition and Monopoly