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

Which combination of features best describes a monopolistically competitive market?

A monopolistically competitive market has many firms selling differentiated but close substitute products, with free entry and exit. Differentiation gives each firm some price-setting power, while many rivals and easy entry keep that power limited and eliminate long-run abnormal profits.

  1. AFew firms, identical product, high barriers to entry
  2. BMany firms, differentiated products, free entry and exitCorrect
  3. CSingle seller, no close substitutes, blocked entry
  4. DMany firms, homogeneous product, perfect information

Explanation

Monopolistic competition has many sellers offering close but differentiated substitutes, with free entry and exit in the long run. Few firms with identical product describes a pure oligopoly, a single seller is monopoly, and homogeneous product with many firms is perfect competition.

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