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IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

Which combination of features best describes a monopolistically competitive market?

Monopolistic competition has many sellers offering differentiated products, with free entry and exit. Differentiation gives each firm some price-setting power, while free entry removes abnormal profit in the long run. Identical products would mean perfect competition, and few sellers would mean oligopoly.

  1. AMany sellers, differentiated products, and free entry and exitCorrect
  2. BFew sellers, identical products, and high barriers to entry
  3. COne seller, no close substitutes, and blocked entry
  4. DMany sellers, identical products, and free entry and exit
  5. Few sellers, differentiated products, and interdependent pricing

Explanation

Monopolistic competition combines many firms and free entry with products that are differentiated by brand, location or quality. Identical products with many sellers describe perfect competition. Few sellers describe oligopoly.

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