Question

A monopolistically competitive market is like a competitive market in that A. both market structures feature easy entry by new firms in the long run. B. the main objective of firms in both market structures is something other than profit maximization. C. firms in both market structures produce the welfare-maximizing level of output. D. firms in both market structures set price above marginal cost.

Answer 1

Perfect competition is on one end of the market structure spectrum, with numerous firms. The word, “numerous” has special meaning in this context. In a perfectly competitive industry, each firm is so small relative to the market that it cannot affect the price of the good. Each perfectly competitive firm is a price taker. Therefore, numerous firms means that each firm is so small that it is a price taker.