IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition
Which of the following is a defining feature of a monopolistically competitive market?
A monopolistically competitive market has many firms selling differentiated products, with free entry and exit in the long run. Differentiation gives each firm some price-setting power, while free entry removes abnormal profit over time. The other options describe monopoly, oligopoly or perfect competition.
- AMany firms sell differentiated products and there is free entry and exit in the long runCorrect
- BA few large firms sell identical products and entry is blocked
- CA single firm sells a product with no close substitutes
- DMany firms sell identical products and each is a price taker
- Two firms choose output simultaneously, each taking the other's output as given
Explanation
Monopolistic competition combines many sellers, product differentiation (so each firm faces a downward-sloping demand curve) and freedom of entry and exit. Identical products with price-taking describes perfect competition, and blocked entry with one firm describes monopoly.
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