1. Monopolistic competition:
a. A large number of firms compete
b. Each firm produces a differentiated product
c. Firms compete on product quality, price, and marketing
d. Firms are free to enter and exit the industry
1. Monopolistic competition:
a. A large number of firms compete
b. Each firm produces a differentiated product
c. Firms compete on product quality, price, and marketing
d. Firms are free to enter and exit the industry
2. In monopolistic competition the firms produce product which are slightly different. These products are closed substitutes. And this product differentiation allows firm to compete in terms of product quality, price, and marketing. The firm products in perfect competition are identical.
3. Collusion is impossible
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The market demand curve in perfect competition slopes downwards, but the firm demand curve is same as the marginal revenue curve. It is horizontal line which shows perfectly elastic demand. In monopoly the firm demand curve slopes downwards and is the same as market demand curve. Marginal revenue curve slopes also downwards and is always below the demand curve. In monopolistic competition the demand curve and marginal revenue curve slopes downwards. But because there is a product differentiation in monopolistic competition, firms advertise their product. Advertising can increase demand, but it also increases the elasticity of demand.
6. Incorrect. A firm in monopolistic competition maximizes its profit by producing where marginal revenue = marginal cost.
7. There is no barrier to entry. If firm are making economic profit, other firms will enter the market. The demand for the firm product will decrease, the D and MR curve will shift left. New firms will stop entering the market if economic profit is zero. When economic profit = 0, firms earn normal profit. If firms in the market have economic losses, some firms will exit the market. That will increase the demand for the products of the remaining firms, shifting the demand curve right. The exit process will end when firms make zero economic