Chapter 16, Problem 1QR

To determine

The attributes of monopolistic competition and its similarities to perfect competition and monopoly.

Explanation of Solution

The three main characteristics of monopolistic competition are as follows:

1. 1. Many sellers: There are many firms competing with each other for the same customers.
2. 2. Product differentiation: Each seller produces similar, but not identical products.
3. 3. Free entry and exit: Firms can enter or exit the market without any restrictions.

Like in monopoly, monopolistic competitive firm faces a downward sloping demand curve as the price is greater than the marginal cost.

Also, similar to that of a perfectly competitive market, a monopolistically competitive firm drives zero economic profit in the long run. This is because, in the long run, price equals the average total cost due to free entry and exit of firms.

Economics Concept Introduction

Concept introduction:

Monopolistic competition: It is an imperfect market structure in which many firms sell products that are differentiated from one another.

Monopoly: It is the market structure characterized by a single seller who sells products that have no close substitutes.

Perfect competition: It is the perfect market structure where there are large numbers of sellers and buyers, with sellers selling homogeneous products.