Question

Which of the following best represents the pricing behavior of firms in a monopolistically competitive industry?
A) Unykdrugs, Inc. produces where its marginal revenue is equal to its marginal cost and prices on its downward-sloping demand curve such that the market for its product clears, knowing it will not face competition due to patents it holds on its products.
B) Teen Angle Hardware looks for a niche to sell its hardware products to teens but finds it difficult to earn anything more than normal profits due to other hardware stores also looking for niches.
C) Looking Over Your Shoulder Handbag Co. chooses the price it charges by estimating what its rivals are most likely to do and then taking their responses into consideration.
D) Stay*Put Clothespins takes the market price of clothespins as given and produces the amount of clothespins where marginal revenue equals marginal cost.

Answer 1

Answer:

The correct answer is option B.

Explanation:

A monopolistic firm is characterized by a large number of buyers and sellers in the market producing differentiated products which are close substitutes, there are relatively easier entry and exit in the market.  

In the given question, Teen Angle Hardware is looking for a niche or a slightly differentiated product to sell to teenagers. But is able to earn only a normal profit because there is a large number of firms in the market. And new firms can enter the market in the long run. So, this firm is an example of a monopolistic firm.