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 monopolistically competitive and perfectly competitive industries share several characteristics, one of the most fundamental being the presence of many buyers and sellers. This ensures that no single firm or consumer has significant market power to dictate prices or output levels.
Comparison of Market Structures
- Perfect Competition:
- In a perfectly competitive market, there are numerous small firms producing identical (homogeneous) products.
- Entry and exit into the market are easy due to the lack of significant barriers.
- Firms are price takers, meaning they must accept the market price determined by supply and demand.
- Consumers have perfect information about prices and products.
- Monopolistic Competition:
- This market structure also consists of many firms and buyers, but unlike perfect competition, firms sell differentiated products rather than identical ones.
- Product differentiation allows firms some degree of pricing power.
- There are low barriers to entry, meaning new firms can enter the market relatively easily.
- Firms compete based on branding, advertising, and slight variations in their products.
Why Not the Other Options?
- A) Firms produce products for which there are no close substitutes.
- Incorrect because in monopolistic competition, firms offer similar but slightly differentiated products, meaning close substitutes exist.
- B) There are high barriers to entry.
- Incorrect because both market structures allow easy entry and exit, unlike monopolies or oligopolies.
- D) Firms are price takers.
- Incorrect for monopolistic competition because firms have some pricing power due to product differentiation.
Thus, Option C is the correct answer, as both market structures have many buyers and sellers, leading to competitive dynamics.
I’ve provided an educational diagram comparing Perfect Competition and Monopolistic Competition to illustrate their differences.