State any two ways by which monopolistic competition and perfect competition are similar and any three ways in which they are different.
(a)Similarities between monopolistic competition and perfect competition are:
(i) There is free entry and exit in both markets.
(ii) There is excess profit for both in the short run.
(iii) There is a large number of firms in the industry.
(iv) Profit is maximized when MC equals MR.
(b) Differences between perfect and monopolistic competition are:
(i) There is product differentiation under monopolistic competition but the goods are homogenous under perfect competition.
(ii) Perfect competition is a price taker but monopolistic competition has some degree of control over price or output.
(iii) There is idle capacity under monopolistic competition but not under perfect competition in the short run.
(iv) The equilibrium level under perfect competition is established where MC = MR = P, but under monopolistic competition, the price will be higher than both MC and MR. (v) Monopolistic competition is a reality but perfect competition does not exist in real life situation.
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