Which of the following is a key difference between a monopolistically competitive firm and a perfectly competitive firm?

• A. A monopolistically competitive firm sells identical products, while a perfectly competitive firm sells differentiated products.
• B. A monopolistically competitive firm cannot freely enter or exit the market, while a perfectly competitive firm can.
• C. A monopolistically competitive firm produces at the minimum of its average total cost curve in the long run, while a perfectly competitive firm does not.
• D. A monopolistically competitive firm faces a downward-sloping demand curve, while a perfectly competitive firm faces a perfectly elastic demand curve.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive firm: it sells identical (homogeneous) products, has many buyers and sellers, and faces a perfectly elastic (horizontal) demand curve at the market price because it is a price taker.
2. Understand the characteristics of a monopolistically competitive firm: it sells differentiated products, has many sellers, and faces a downward-sloping demand curve because it has some market power to set prices due to product differentiation.
3. Compare the demand curves faced by both types of firms: a perfectly competitive firm faces a perfectly elastic demand curve, meaning it can sell any quantity at the market price but nothing above it; a monopolistically competitive firm faces a downward-sloping demand curve, meaning it can raise prices but will sell fewer units.
4. Review the options given and identify which statement correctly contrasts the demand curve characteristics of the two market structures.
5. Conclude that the key difference is that a monopolistically competitive firm faces a downward-sloping demand curve, while a perfectly competitive firm faces a perfectly elastic demand curve.