ACCA Performance Management (F5) Certification Practice Exam

In monopolistic competition, products are characterized as:

1. Identical

2. Homogeneous

3. Similar but not identical

4. Unique with no substitutes

The correct answer is: Similar but not identical

In monopolistic competition, firms sell products that are similar but not identical. This characteristic differentiates them from perfect competition, where products are homogeneous or identical. In monopolistic competition, each firm produces a product that has unique features or branding that make it distinct in the eyes of consumers, though it competes within a broader category. For example, various brands of toothpaste may have similar functions (cleaning teeth) but differ in flavor, packaging, or additional features (like whitening or sensitivity reduction) that give consumers preferences, thus allowing firms to maintain some degree of market power and charge prices above marginal cost. This situation fosters a unique selling proposition for each firm while still operating in a competitive environment, as there will still be substitute products available from other firms. The presence of substitutes means that while products are differentiated, they must also compete against each other, keeping prices from rising too high and ensuring a diversity of options for consumers.