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Question
Why is the demand curve of a firm under monopolistic competition more elastic than under monopoly? Explain.
Solution
The demand curve under monopolistic competition is more elastic than under monopoly. The reason behind this can be attributed to the fact that the nature of the goods available in both the markets is different. That is, under monopolistic market, there is a wide range of close substitutes available for the good whereas, in monopoly market, the monopolist is the single seller and there are no close substitutes available for its product. Due to this, the demand curve under monopoly is less responsiveness to the changes in prices of the good. In contrast to this, in monopolistic market, due to the availability of a wide range of substitutes, there is a higher responsiveness of demand to the changes in prices. Hence, we can infer that the demand curve under monopolistic competition is more elastic than under monopoly.
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