A monopolistically competitive business has a demand curve that is:
options: unit elastic
inelastic perfectly
inelastic
perfectly elastic
elastic
The correct answer and explanation is:
The correct answer is: elastic.
In monopolistic competition, firms sell products that are differentiated from those of their competitors, meaning they offer unique goods or services that consumers perceive as different. This allows them to have some degree of market power, meaning they can influence the price of their product to some extent. However, because there are many competitors offering similar but not identical products, the demand curve for a monopolistically competitive firm is relatively more elastic compared to a monopoly.
An elastic demand curve means that small changes in price lead to relatively larger changes in the quantity demanded. In monopolistic competition, if a firm raises its price too much, consumers can easily switch to another product from a competing firm, since many close substitutes are available. This makes the demand curve elastic, meaning it is responsive to price changes.
The degree of elasticity depends on factors such as how close the substitute goods are and the degree of differentiation between products. If the product is highly differentiated, the demand curve could be less elastic, but it will still generally be more elastic than that of a monopoly, where consumers have fewer options.
In contrast, in perfectly elastic demand, consumers are willing to buy any quantity at one price and none at a price even slightly higher. Perfectly inelastic demand means that quantity demanded does not change with price, which is not typical for monopolistically competitive firms. An inelastic demand curve would mean consumers do not respond much to price changes, which is more characteristic of monopolies with few substitutes.
Thus, in monopolistic competition, the demand curve is generally elastic, reflecting the fact that consumers have many alternatives and can respond to price changes by switching products.