If the number of firms in a monopolistically competitive industry increases and the degree of product
differentiation diminishes:
A) the likelihood of realizing economic profits in the long run would be enhanced.
B) individual firms would now be operating at outputs where their average total costs would be higher.
C) the industry would more closely approximate pure competition.
D) the likelihood of collusive pricing would increase.

Question

15-08-2019
Business

contestada

If the number of firms in a monopolistically competitive industry increases and the degree of product
differentiation diminishes:
A) the likelihood of realizing economic profits in the long run would be enhanced.
B) individual firms would now be operating at outputs where their average total costs would be higher.
C) the industry would more closely approximate pure competition.
D) the likelihood of collusive pricing would increase.

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Answer: If in a monopolistically competitive industry , the number of firms increase and also there is a decrease in product differentiation then the industry would more closely approximate pure competition.

Under the following scenario, the monopolistically competitive industry will have several firm selling commodities/services that are less differentiated than before i.e. somehow similar products. This scenario closely approximate pure competition where there are many sellers selling similar product.

Therefore the correct option is (c)