Which of the following statements is correct?
a. Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers.
b. Monopolistic competition is similar to perfect competition because both market structures are characterized by differentiated products.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized by strategic interaction between firms in the market.
d. Monopolistic competition is similar to perfect competition because both market structures are characterized by perfectly elastic demand curves for firms.

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UpStudy AI · Accepted Answer

1. **Analyzing Statement a:**

- In monopolistic competition, firms sell differentiated products and face a downward sloping demand curve.
   - This feature gives them some control over the price they charge.
   - Similarly, a monopoly has a downward sloping market demand curve, so the monopolist is also a price maker.
   - Therefore, statement a is correct.

2. **Analyzing Statement b:**

- Perfect competition is characterized by homogeneous products, meaning products are identical across firms.
   - Monopolistic competition, by contrast, involves differentiated products.
   - Hence, stating that they are similar because both have differentiated products is incorrect.

3. **Analyzing Statement c:**

- Oligopoly is characterized by strategic interactions among a few interdependent firms.
   - In monopolistic competition, while each firm has some market power due to product differentiation, the large number of competitors generally minimizes strategic interaction.
   - Thus, this statement is incorrect.

4. **Analyzing Statement d:**

- In perfect competition, firms face a perfectly elastic demand curve, meaning $$ P = MR $$ for all firms.
   - Monopolistic competition firms, however, face a downward sloping demand curve due to product differentiation.
   - This makes the statement false.

$$
\textbf{Final Answer: a}
$$
Statement a is correct.

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