Why does each monopolistically competitive firm generally have limited control over market price?

• A. Because there are many firms selling similar but differentiated products, so consumers can easily switch to close substitutes.
• B. Because each firm produces a unique product with no close substitutes.
• C. Because firms in monopolistic competition are price takers like those in perfect competition.
• D. Because government regulation sets the price for all firms in the market.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the market structure of monopolistic competition, which is characterized by many firms selling products that are similar but not identical (differentiated products).
2. Step 2: Recognize that product differentiation means each firm has some degree of market power, allowing it to set prices above marginal cost, unlike perfect competition where firms are price takers.
3. Step 3: Note that despite this market power, the presence of many close substitutes limits the firm's ability to raise prices significantly without losing customers to competitors.
4. Step 4: Realize that this limited control over price arises because consumers can easily switch to other firms' products if one firm raises its price too much.
5. Step 5: Conclude that the key reason for limited price control in monopolistic competition is the combination of many firms and the availability of close substitutes, which constrains pricing decisions.