Q4Managerial Economics & Financial Accounting
Question
a) Why is the demand curve of a firm under monopolistic competition more elastic than under monopoly? Explain. b) Explain 'freedom of entry and exit to firms in industry' feature of monopolistic competition. (2+2=4)
Answer
Monopolistic competition is more elastic due to close substitutes. Freedom of entry/exit ensures only normal profits in the long run.
(a) Demand Curve Elasticity: The demand curve under monopolistic competition is more elastic than under monopoly because consumers have many close substitutes available. If one firm raises its price, consumers can easily switch to a competitor's brand. (b) Freedom of Entry/Exit: New firms can easily enter the market if they see supernormal profits being made, and existing firms can leave if they incur losses. This ensures that in the long run, all firms earn only normal profit.