A monopolistically competitive firm’s demand curve will be highly elastic if which of the following exists?

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BlackTom AI · Accepted Answer

The question asks about when a monopolistically competitive firm’s demand curve will be highly elastic. 
Option 1: 'A high degree of product differentiation' would actually make demand more inelastic for a given firm, because each firm’s product is seen as distinct and buyers may be less responsive to price changes since substitutes are not perfect. 
Option 2: 'A high degree of product substitutability' increases the availability of close substitutes, so when the firm raises price, many consumers can switch to similar products from competitors, making the demand for this firm highly elastic. This aligns with core microeconomic principles about elasticity and substitutability. 
Option 3: 'A small number of competitors' tends to reduce the intensity of competition and can make demand less elastic for each firm, since fewer close substitutes are available and price changes have less fallback options for consumers. 
Option 4: 'High barriers to entry in this industry' affect long-run market dynamics and industry profitability, but they do not directly determine the elasticity of an individual firm’s demand curve; this feature tends to influence supply flexibility and market structure rather than substitution responsiveness. 
Option 5: 'A highly elastic supply curve for the firm' concerns the price–quantity response of the firm’s own supply, not the elasticity of the demand curve facing the firm, so it does not describe why the demand would be highly elastic. 
In summary, the key concept is that the presence of many close substitutes (high substitutability) makes consumers more responsive to price changes, yielding a highly elastic demand for the monopolistically competitive firm.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

A monopolistically competitive firm’s demand curve will be highly elastic if which of the following exists?

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