In a monopolistic competition market structure, who primarily determines the price of a firm's product?

• A. Prices are set collectively by all firms in the market
• B. Each individual firm sets its own price
• C. The government sets the price
• D. Consumers set the price directly

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: many firms sell differentiated products, and each firm has some degree of market power.
2. Recognize that because products are differentiated, each firm faces a downward-sloping demand curve for its own product.
3. Since each firm faces its own demand curve, it can choose the price that maximizes its profit by considering the relationship between price, quantity demanded, and costs.
4. Therefore, unlike perfect competition where price is given, in monopolistic competition, each individual firm sets its own price based on its demand and cost conditions.
5. Summarize that the price is not set collectively, by the government, or directly by consumers, but by each firm independently within the competitive environment.