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SSC Micro Macro Economics P-I QUESTION #1690
Question 1
Monopolistic competition structurally differs from perfect competition primarily because of one defining characteristic. Which of the following distinguishes monopolistic competition from perfect competition?
  • The presence of a large number of competing firms
  • The absence of significant barriers to entry and exit
  • The existence of product differentiation among competing firms✔️
  • The complete absence of price competition in the monopolistically competitive market
Correct Answer Explanation
The critical distinction is product differentiation. In perfect competition, products are homogeneous (identical); in monopolistic competition, each firm's product is slightly differentiated (by branding, quality, location, etc.), giving firms some degree of market power and a downward-sloping demand curve. Both market structures have many firms and relatively free entry/exit. Price competition exists in both, though it is less intense in monopolistic competition.