Question

In monopolistic competition

A.

each firm has limited power to influence the price of its product.

B.

each firm has a large market share.

C.

a single firm can dictate market conditions.

D.

collusion is possible.

Answer 1

.

Right option is B-each firm has limited power to influence the price of its product.

Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.

A monopolistic competitive industry has the following features:

Many firms.
Freedom of entry and exit.
Firms produce differentiated products.
Firms have price inelastic demand; they are price makers because the good is highly differentiated
Firms make normal profits in the long run but could make supernormal profits in the short term
Firms are allocatively and productively inefficient.