In both monopolistically competitive and perfectly competitive industries
A) firms produce products for which there are no close substitutes.
B) there are high barriers to entry.
C) there are many buyers and sellers.
D) firms are price takers.
The correct answer and explanation is :
Correct Answer: C) There are many buyers and sellers.
Explanation:
Both monopolistic competition and perfect competition share certain characteristics, one of which is the presence of many buyers and sellers in the market. This means that no single firm has significant control over the market price or overall supply.
- Many Buyers and Sellers:
- In a perfectly competitive market, there are numerous firms, each producing identical products. This ensures that no single firm can influence the price, as consumers have plenty of choices.
- In a monopolistically competitive market, there are also many firms, but each one sells a slightly differentiated product. However, the presence of many competitors means that firms must still compete for market share.
- Why the Other Choices Are Incorrect:
- (A) Firms produce products for which there are no close substitutes:
- This is true for perfect competition (identical products), but not for monopolistic competition, where firms differentiate their products.
- (B) There are high barriers to entry:
- Both market structures have low barriers to entry, meaning new firms can enter the market relatively easily.
- (D) Firms are price takers:
- In perfect competition, firms are true price takers, as identical products mean they must accept the market price.
- In monopolistic competition, firms have some pricing power due to product differentiation, so they are not pure price takers.
Thus, the key common feature between these two market structures is the presence of many buyers and sellers, making option C the correct choice.
Here is an economic diagram comparing perfect competition and monopolistic competition. The left side illustrates perfect competition with identical products and price-taking behavior, while the right side represents monopolistic competition with product differentiation and some pricing power.