One of the reasons for low cross-price elasticity in monopolistic competition and high cross-price elasticity in perfect competition is that
A)Firms in perfect competition differentiate their products.
B)In monopolistic competition brand loyal consumers view other available products as poor substitutes.
C)Consumers do not have perfect substitutes in perfect competition.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms differentiate their products to create brand loyalty among consumers. As a result, consumers view other available products as poor substitutes and are less likely to switch to alternatives even if the price of the product they are loyal to increases. This leads to low cross-price elasticity. In contrast, in perfect competition, firms offer standardized products and consumers have perfect substitutes, so they are more likely to switch to alternatives if the price of a particular product increases. This leads to high cross-price elasticity.

One of the Reasons for Low Cross-Price Elasticity in Monopolistic