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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

Which combination of features best describes a market under monopolistic competition?

Monopolistic competition is characterised by many sellers offering differentiated but close substitute products, with free entry and exit. Product differentiation gives each firm some control over its price, while the large number of firms and easy entry keep long-run profits at a normal level.

  1. AMany sellers offering differentiated products with free entry and exitCorrect
  2. BA single seller of a product with no close substitutes
  3. CFew sellers with strong mutual interdependence in pricing
  4. DMany sellers offering identical products and accepting the market price

Explanation

Monopolistic competition has a large number of sellers whose products are close but not perfect substitutes, and firms can enter or leave freely. A single seller describes monopoly, few interdependent sellers describes oligopoly, and identical products with price-taking describes perfect competition.

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