Theory question 107
Market StructuresSection B: answer three questions only from this section.
State any two ways by which monopolistic competition and perfect competition are similar and any three ways in which they are different.
Show the model answer
Similarities (any two): both have a large number of firms
Free entry into and exit from the industry
Both maximise profit where MC = MR
Both can make supernormal profit in the short run but only normal profit in the long run
Differences (any three): products are homogeneous in perfect competition but differentiated in monopolistic competition
A perfect competitor is a price taker; a monopolistic competitor has some control over price
The demand curve is horizontal (perfectly elastic) in perfect competition but downward sloping in monopolistic competition
In equilibrium P = MR = MC in perfect competition; in monopolistic competition P is greater than MR and MC
Advertising is used in monopolistic competition but not needed in perfect competition
Monopolistic competition has excess capacity in the long run; perfect competition produces at minimum AC
Two similarities and three differences.