An oligopoly firm is similar to a monopolistically competitive firm in that:

• A. Both face perfectly elastic demand curves.
• B. Both have some degree of market power and can set prices above marginal cost.
• C. Both operate in markets with only one seller.
• D. Both produce identical products with no differentiation.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of an oligopoly market structure. Oligopoly consists of a few firms that have some control over the market price due to limited competition.
2. Step 2: Understand the characteristics of monopolistic competition. Firms in monopolistic competition sell differentiated products and have some degree of market power, allowing them to set prices above marginal cost.
3. Step 3: Analyze the demand curves faced by firms in both market structures. In monopolistic competition, the demand curve is downward sloping (not perfectly elastic), and in oligopoly, demand elasticity depends on the behavior of rival firms, so it is not perfectly elastic either.
4. Step 4: Compare the degree of market power. Both oligopoly and monopolistic competition firms have some market power, meaning they can influence prices rather than being price takers.
5. Step 5: Conclude that the similarity between oligopoly and monopolistic competition is that both have some degree of market power and can set prices above marginal cost, unlike perfect competition where firms are price takers.