CFA Level I · CFA Level I Exam · The Firm and Market Structures
In a monopolistically competitive industry, a firm's demand curve is most likely:
The demand curve is downward sloping but highly elastic. Differentiation gives each firm some pricing power, while many close substitutes mean that a price increase causes a large loss of sales. Perfectly elastic demand fits perfect competition instead.
- Aperfectly elastic at the market price
- Bdownward sloping and highly elastic because close substitutes existCorrect
- Cperfectly inelastic because of product differentiation
Explanation
Product differentiation gives each firm some pricing power, so its demand slopes downward. Many close substitutes make that demand quite elastic. Perfectly elastic demand describes perfect competition, and perfectly inelastic demand is not characteristic of any of these structures.
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