Which of the following would best be described as monopolistic competition? a.There are many restaurants in...

Which of the following would best be described as monopolistic competition?

a.There are many restaurants in Melrose, each of which is slightly different from the others.

b.There are many companies which produce toilet paper, and consumers consider all toilet paper to be very similar.

c.There is one gas station in the central business district of Lynnfield, and local consumers consider it to have noclose substitutes.

d.There are three gas stations within a few hundred feet of a highway exit, and consumers consider their gasoline to be identical.

Solutions

Expert Solution

Option A

There are many restaurants in Melrose, each of which is slightly different from the others.

Monopolistic competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect those of its competitors.In this case there are many restaurants which are slightly different from each other and hence are not perfect substitutes.

Firms in Monopolistic Competition 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.

Rahul Sunny answered 1 year ago

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