Question

Steve is about to start up a business in a monopolistically competitive market. Which of the following can he expect?

a.
He can expect to face an infinitely elastic demand curve.

b.
He can expect to enjoy a huge amount of market power.

c.
He can expect market entry to be difficult as there exist entry barriers.

d.
He can expect to face a highly inelastic demand curve.

e.
He can expect to find close substitutes of the product he is planning to produce.

Answer 1

e.

He can expect to find close substitutes of the product he is planning to produce.

Step-by-step explanation:

A competitive market is one in which: (1) there are many buyers and many sellers in the market; (2) the goods offered by the various sellers are largely the same; and (3) usually firms can freely enter or exit the market. Therefore Steve should expect to find close substitutes of the product he is planning to produce.

Answer 2

The answer is B. He can expect to enjoy a huge amount of market power.

Step-by-step explanation:

In a monopolistically competitive market, firms enjoy control over the terms and conditions of exchange in the market. They can raise their prices without losing all their customers,and also lower prices without triggering a potentially ruinous price war with competitors. A monopolistically competitive firm has market power because it has very few competitors who do not engage in strategic decision making. In the market, the firms sell differentiated product.