Monopolistically competitive and purely competitive industries are similar in that:

• A. firms in both industries are free to enter and exit the market
• B. firms in both industries face downward-sloping demand curves
• C. firms in both industries produce identical products
• D. firms in both industries are price makers

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the characteristics of a purely competitive industry. In pure competition, many firms sell identical products, and each firm is a price taker, meaning it faces a perfectly elastic (horizontal) demand curve at the market price.
2. Step 2: Understand the characteristics of a monopolistically competitive industry. Here, many firms sell differentiated products, and each firm faces a downward-sloping demand curve, giving them some degree of price-making power.
3. Step 3: Identify the common features between the two market structures. Both types of industries allow free entry and exit of firms in the long run, which affects profits and market dynamics.
4. Step 4: Compare the demand curves faced by firms in each industry. Purely competitive firms face perfectly elastic demand curves, while monopolistically competitive firms face downward-sloping demand curves.
5. Step 5: Conclude which statement correctly describes the similarity. Since free entry and exit is a key feature shared by both, the correct similarity is that firms in both industries are free to enter and exit the market.