Which of the following is an assumption of monopolistic competition?
A) Firms produce identical (homogeneous) outputs.
B) There are many firms in the industry.
C) Production occurs with decreasing returns to scale technology.
D) Each firm faces a perfectly elastic demand curve.

Question

Quizplus · Accepted Answer

Monopolistic competition assumes that there are many firms in the industry. In fact, it is characterized by a relatively large number of small firms competing against each other with slightly differentiated products. Option A is an assumption of perfect competition where firms produce identical outputs, option C is an assumption of decreasing returns to scale which may or may not occur in monopolistic competition and option D is an assumption of a perfectly competitive market where each firm faces a horizontal or perfectly elastic demand curve.

Which of the Following Is an Assumption of Monopolistic Competition