Multiple Choice QuestionThe demand curve faced by a monopolistically competitive firm is Blank______.Multiple choice question.highly but not perfectly elastichighly but not perfectly inelasticperfectly inelasticperfectly elasticunit-elastic
Question
Multiple Choice QuestionThe demand curve faced by a monopolistically competitive firm is Blank______.Multiple choice question.highly but not perfectly elastichighly but not perfectly inelasticperfectly inelasticperfectly elasticunit-elastic
Solution
The demand curve faced by a monopolistically competitive firm is highly but not perfectly elastic.
Here's why:
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Monopolistic competition is a market structure characterized by many firms selling differentiated products. Differentiated products are substitutes but not perfect substitutes.
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Because products are differentiated, each firm has some degree of market power, which means they have some control over the price of their product.
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However, because there are many firms and the products are substitutes, the demand curve that each firm faces is downward sloping, indicating that if they raise their price, they will lose some but not all of their customers to competitors.
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This makes the demand curve more elastic than it would be for a monopoly (where the firm has a lot of control over price because they are the only seller) but less elastic than it would be for perfect competition (where the firm has no control over price because there are many sellers selling identical products).
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Therefore, the demand curve faced by a monopolistically competitive firm is highly but not perfectly elastic.
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