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CA Foundation · Business Economics · Price Determination in Different Markets

In monopolistic competition, the demand curve faced by an individual firm is generally more elastic than that faced by a monopolist. What is the main reason?

Demand is more elastic because many rival firms offer close substitutes. If one firm raises its price, a large share of buyers switch to competing brands. A monopolist has no close substitutes, so its demand is less elastic, while monopolistic competitors are not price takers either.

  1. AClose substitutes are offered by many rival firmsCorrect
  2. BThe firm produces a homogeneous product
  3. CThe firm is a price taker
  4. DEntry barriers are very high

Explanation

Many rivals sell close substitutes, so a price rise causes customers to switch readily, making demand fairly elastic. A homogeneous product and price-taking behaviour belong to perfect competition. High entry barriers are a feature of monopoly, not monopolistic competition.

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