ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A town has many independent cafés. Each sells coffee and food that customers see as slightly different because of branding and atmosphere, and new cafés can open easily. Which statement about this market is correct?
Each café has some control over its price because its product is differentiated by branding and atmosphere. This is monopolistic competition, where entry is easy, so abnormal profits tend to disappear in the long run.
- AEach café is a price taker because all products are identical
- BEach café has some control over price because of product differentiationCorrect
- CBarriers to entry are high, so cafés earn abnormal profits in the long run
Explanation
This is monopolistic competition: many sellers, differentiated products and easy entry. Differentiation gives each firm some pricing power. Easy entry means abnormal profits are competed away in the long run, and identical products would imply perfect competition.
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