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Monopolistic Competition Study Guide

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Questions and Answers

In monopolistic competition, what characterizes the market structure?

A domination by one firm

A completely uniform product offering

A large number of firms competing (correct)

A small number of firms competing

What does product differentiation mean in the context of monopolistic competition?

Producing identical products as competing firms

Colluding with other firms to fix prices

Creating products that are slightly different from competitors' products (correct)

Ignoring product quality and marketing

Why are firms in monopolistic competition sensitive to the average market price?

To influence the pricing strategies of other firms

To fix prices through collusion

To determine their own pricing strategies (correct)

To gain more market power

What is the significance of a firm's limited market power in monopolistic competition?

It limits the firm's ability to influence the price of its product Signup and view all the answers

Why is collusion or conspiring to fix prices impossible in monopolistic competition?

As a result of the large number of competing firms and limited market power Signup and view all the answers

What is the key characteristic of a market in monopolistic competition?

Differentiated products Signup and view all the answers

How do firms in monopolistic competition compete with each other?

By advertising and product differentiation Signup and view all the answers

What does the limited market power of each firm in monopolistic competition imply?

The inability to affect the actions of other firms Signup and view all the answers

Why do firms in monopolistic competition engage in product differentiation?

To create brand loyalty among consumers Signup and view all the answers

What is impossible for firms in monopolistic competition due to the large number of competing firms?

Price collusion Signup and view all the answers

What is the defining characteristic of a market in monopolistic competition?

Limited market power of each firm Signup and view all the answers

Why are firms in monopolistic competition free to enter and exit the industry?

As a result of the differentiated products produced Signup and view all the answers

What does product differentiation imply in the context of monopolistic competition?

A slightly different product from competing firms Signup and view all the answers

Why do firms in monopolistic competition use brand names and engage in advertising?

To create a perception of product distinctiveness Signup and view all the answers

What makes collusion or conspiring to fix prices impossible in monopolistic competition?

The limited market power of each firm Signup and view all the answers