Question

The demand curve facing individual firms is __­­­_________in monopolistic competition and __________ in perfect competition. Group of answer choices

A) downward sloping; horizontal

B) horizontal ; downward sloping

C) downward sloping; downward sloping

D) vertical; horizontal

Answer 1

Correct option - A) downward sloping; horizontal.

The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm’s individual demand curve is perfectly elastic. This is due to the fact that firms have market power: they can raise prices without losing all of their customers. In this type of market, these firms have a limited ability to dictate the price of its products; a firm is a price setter not a price taker (at least to some degree). The source of the market power is that there are comparatively fewer competitors than in a competitive market, so businesses focus on product differentiation, or differences unrelated to price. By differentiating its products, firms in a monopolistically competitive market ensure that its products are imperfect substitutes for each other. As a result, a business that works on its branding can increase its prices without risking its consumer base.