Question

What is one difference between a firm in a perfectly competitive industry and a firm in a monopolistically competitive industry?
A) A monopolistically competitive firm does not face a downward-sloping demand curve.
B) A monopolistically competitive firm faces competition from firms producing close substitutes.
C) A monopolistically competitive firm is guaranteed to make more than normal profits in the long run.
D) A monopolistically competitive firm does not choose a level of output where marginal cost is equal to marginal revenue.

Answer 1

Answer:

Letter b is correct. A monopolistically competitive firm faces competition from firms producing close substitutes.

Explanation:

Monopolistic competition is an economic situation that occurs when companies exhibit imperfect competition, that is, companies market similar but not identical products, which characterize them as substitute but not perfect substitute products.

Products may have different variables, such as quality, price and reputation in the market. The greater the degree of product differentiation, the more price control the company will have.