The figure given below shows the revenue and cost curves of a firm. MC represents the marginal cost curve, AC the average cost curve, MR the marginal revenue curve, and AR the average revenue curve.Figure 9.4

-Steve is about to start up a business in a monopolistically competitive market. Which of the following can he expect?
A)He can expect market entry to be difficult as there exist entry barriers.
B)He can expect to enjoy a huge amount of market power.
C)He can expect to face a highly inelastic demand curve.
D)He can expect to find close substitutes of the product he is planning to produce.
E)He can expect to face an infinitely elastic demand curve.

Question

The figure given below shows the revenue and cost curves of a firm. MC represents the marginal cost curve, AC the average cost curve, MR the marginal revenue curve, and AR the average revenue curve.Figure 9.4
 
-Steve is about to start up a business in a monopolistically competitive market. Which of the following can he expect?
A)He can expect market entry to be difficult as there exist entry barriers. 
B)He can expect to enjoy a huge amount of market power. 
C)He can expect to face a highly inelastic demand curve. 
D)He can expect to find close substitutes of the product he is planning to produce. 
E)He can expect to face an infinitely elastic demand curve.

Quizplus · Accepted Answer

Monopolistically competitive markets have low entry barriers, hence it is easy to enter, and hence option A is incorrect. The degree of market power for firms in a monopolistically competitive market is less, as there are close substitutes for the products produced, hence option B is incorrect. The demand curve facing a firm in a monopolistically competitive market is elastic, but not infinitely so, hence option E is incorrect. The products in a monopolistically competitive market are differentiated, but close substitutes do exist, hence option D is correct.

The Figure Given Below Shows the Revenue and Cost Curves