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CA Foundation · Business Economics · Price Determination in Different Markets

Which of the following is the main source of the downward-sloping, fairly elastic demand curve faced by a firm under monopolistic competition?

The firm's demand curve is downward sloping and fairly elastic because of product differentiation together with many close substitutes. Differentiation gives some price control, while substitutes limit it. Single-seller barriers, homogeneous products and mutual interdependence describe monopoly, perfect competition and oligopoly respectively.

  1. AProduct differentiation combined with the presence of many close substitutesCorrect
  2. BExistence of a single seller with strong barriers to entry
  3. CPerfectly homogeneous products sold by many sellers
  4. DMutual interdependence among a very small number of firms

Explanation

Each firm sells a differentiated product, so it has some control over price and its demand slopes downward. Because many close substitutes exist, demand is fairly elastic. A single seller describes monopoly, homogeneous products describe perfect competition, and interdependence among few firms describes oligopoly.

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