Question:
The following two characteristics define a particular type of market: A. Close substitute products are sold by firms B. Free entry and exit of firms. Select the correct option from below.
The following two characteristics define a particular type of market: A. Close substitute products are sold by firms B. Free entry and exit of firms. Select the correct option from below.
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Monopolistic competition = many firms + product differentiation + close substitutes + free entry and exit.
Updated On: May 22, 2026
- Perfect Competition
- Monopoly
- Oligopoly
- Monopolistic Competition
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The Correct Option is D
Solution and Explanation
Concept: Monopolistic competition is a market structure in which many firms sell differentiated products that are close substitutes, and there is freedom of entry and exit.
Step 1: Understanding close substitute products.
In monopolistic competition, firms sell products that are similar but not identical. For example, different brands of toothpaste, soap, or restaurants. \[ \text{Products} = \text{Differentiated but close substitutes} \]
Step 2: Understanding free entry and exit.
Firms can enter the market if profits are attractive and leave the market if losses occur. This is also a feature of monopolistic competition.
Step 3: Eliminating other markets.
Perfect competition has homogeneous products.
Monopoly has only one seller.
Oligopoly has few large firms and entry barriers. Therefore, the correct market type is Monopolistic Competition.
Step 1: Understanding close substitute products.
In monopolistic competition, firms sell products that are similar but not identical. For example, different brands of toothpaste, soap, or restaurants. \[ \text{Products} = \text{Differentiated but close substitutes} \]
Step 2: Understanding free entry and exit.
Firms can enter the market if profits are attractive and leave the market if losses occur. This is also a feature of monopolistic competition.
Step 3: Eliminating other markets.
Perfect competition has homogeneous products.
Monopoly has only one seller.
Oligopoly has few large firms and entry barriers. Therefore, the correct market type is Monopolistic Competition.
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