Compared to a perfectly competitive firm, the demand curve facing a monopolistically competitive firm is
A) more elastic because there are many close substitutes for the product of a monopolistically competitive firm.
B) less elastic because monopolistically competitive firms produce similar, but not identical, products.
C) just as elastic because there are many sellers in both markets.
D) more elastic because in the long run, the demand curve is tangent to the firm’s average total cost curve.
The correct answer and explanation is :
Correct Answer:
B) less elastic because monopolistically competitive firms produce similar, but not identical, products.
Explanation:
In microeconomics, the demand curve for a firm depends on the market structure in which it operates. A perfectly competitive firm faces a perfectly elastic demand curve, meaning that it can sell any quantity of its product at the market price but cannot set its own price. This is because there are many identical products available, and if one firm raises its price, consumers will immediately switch to competitors.
In contrast, a monopolistically competitive firm produces a product that is similar but differentiated from its competitors. Product differentiation can take many forms, such as brand names, quality, design, location, or customer service. Because of these differences, the firm has some degree of market power, meaning it can raise its price without losing all of its customers. However, since there are still many substitutes available in the market, the demand curve is not perfectly inelastic—it is just less elastic than in perfect competition.
Since consumers do not see all products as identical, they may be willing to pay a slightly higher price for one firm’s product over another. However, if the price is raised too much, consumers will switch to close substitutes, making the demand curve still fairly elastic—just not as much as in perfect competition.
Thus, the correct answer is B), the demand curve facing a monopolistically competitive firm is less elastic than that of a perfectly competitive firm because of product differentiation.
Here is an economic graph comparing the demand curves of a perfectly competitive firm and a monopolistically competitive firm. The image illustrates how a perfectly competitive firm’s demand curve is perfectly elastic, while a monopolistically competitive firm’s demand curve is downward-sloping and less elastic due to product differentiation.