Question

Which of the following conditions distinguishes monopolistic competition from perfect competition? 

a. the number of sellers in the market 

b. the freedom of entry and exit by firms in the market 

c. the size of firms in the market 

d. product differentiation 

A monopolistically competitive firm chooses its 

a. price and quantity just as a monopoly does. 

b. quantity but faces a horizontal demand curve just as a competitive firm does. 

c. price but can sell any quantity at the market price just as an oligopoly does. 

d. price and quantity based on the decisions of the other firms in the industry just as an oligopoly does.

 

Answer 1

First Question: In a monopolistic competitive market, there are a large number of buyers and sellers, firms can easily enter or exit the market and size of the firms, all these features are same as they are in the perfectly competitive market. The only difference between these two markets is of product differentiation. In a perfectly competitive market, firms sell homogeneous products that mean they are all same but in a monopolistic competitive market, firms sell differentiated products, which gives them some power to influence the price. Hence, the correct answer is Option D i.e. product differentiation.

Second Question: A monopolistic competitive firm and monopoly firm both choose to produce the output where marginal revenue and marginal cost both are equivalent to each other. So, the method of choosing the price and quantity under both the markets is same. Hence, Option A is the correct answer.

Option B is incorrect because the demand curve of the monopolistic competitive firm is downward sloping not horizontal.

Option C is incorrect because it can not sell any output at the market price as his output negatively affects the market price.

Option D is incorrect as in the monopolistic competitive market, firms are not interdependent on each other as they are in oligopoly.