Answer to Question #242433 in Macroeconomics for Dolly

Question

Describe the nature of the goods produced by a monopolistically competitive firm for 10marks

Answer 1

Monopolistically competitive firms produce differentiated products. The differentiated products under monopolistic competition provides an inelastic demand curve. These kind of goods are not perfect substitutes because they are different in their branding and quality. Additionally, the price of goods is charged based on their rivals firms and they ignore the impact of its own price on price of other firms. The price of goods is actually more than marginal cost and the monopolistic competitive firms differentiate them in three ways:-

a) simple:- products are differentiated based on their characteristics.

b) horizontal:- products are differentiated in a single feature but here consumer don't know about which product have good quality.

c) vertical:- products are differentiated in a single feature and consumer knows about which product have higher quality.

So monopolistic competitive firm will not produce homogeneous products, they always keep a unique branding or quality to their products.