Monopolistic competition is a more realistic market model than the polar models
ID: 1203511 • Letter: M
Question
Monopolistic competition is a more realistic market model than the polar models of pure competition and pure monopoly. Like the perfect competition model the monopolistic competition model assumes that the firms produce homogeneous goods. Like the perfect competition model, the monopolistic competition model assumes that there are so many sellers in a particular industry that no one seller can influence market supply (and therefore price) by increasing or decreasing the quantity of output it produces. The monopolistically competitive firm is a "price taker." If it tried to charge a higher price, it would lose all of its customers. If you wanted Titleist golf balls or a Ralph Lauren sweater, you'd have to buy them from what is essentially a monopolist because, even though there are a lot of producers of golf balls and sweaters, there is only one producer of that brand. To help distinguish it's product from the others in the industry, the monopolistically competitive firm often invests in advertising. Advertising is more important in the perfectly competitive model than it is in the monopolistically competitive model. Whether the distinction among products is physical, psychological or just imagined, the product distinction is designed to allow the firm to engage in non-price competition. As a result of product differentiation, the demand curve for a firm's product is downward sloping rather than perfectly elastic. Because of the "no barriers to entry" characteristic of this market model, the monopolistically competitive firm can expect to make significant economic profits in the long-run equilibrium.
Explanation / Answer
1) True
2) True
3) False
4) False
5)
6) True
7) False
8) False
9) False
10) True