In what way is monopolistic competition similar to perfect competition?

• A. Both market structures result in firms earning long-run economic profits.
• B. Both market structures have significant barriers to entry.
• C. Both market structures have firms producing identical products.
• D. Both market structures feature many firms competing against each other.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the characteristics of perfect competition. In perfect competition, there are many firms, each producing identical (homogeneous) products, with no barriers to entry or exit, and firms are price takers.
2. Step 2: Understand the characteristics of monopolistic competition. In monopolistic competition, there are also many firms, but each firm produces a differentiated product, and there are low or no significant barriers to entry, allowing free entry and exit in the long run.
3. Step 3: Compare the number of firms in both market structures. Both perfect competition and monopolistic competition have many firms competing, which means no single firm has significant market power to control prices.
4. Step 4: Identify the key difference in product type. Perfect competition involves identical products, while monopolistic competition involves differentiated products, so this is not a similarity.
5. Step 5: Conclude that the similarity lies in the presence of many competing firms, which leads to competitive pressures in both markets, even though the nature of the products and market power differ.