The relationship between a monopolistic competitive firm's marginal revenue curve and its demand curve is that the
A)two curves coincide and are horizontal at the market price.
B)marginal revenue curve lies above the demand curve and the demand curve is horizontal at the market price.
C)marginal revenue curve lies below the demand curve and both are downward sloping.
D)two curves coincide and are downward sloping to the right.
E)marginal revenue curve lies above the demand curve and both are downward sloping.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, the demand curve faced by a firm is downward sloping, indicating that the firm can sell more only by lowering its price. The marginal revenue curve lies below the demand curve because, to sell an additional unit, the firm must lower its price not just on the last unit sold but on all previous units as well, which means the additional revenue generated by selling one more unit (marginal revenue) is less than the price at which the unit is sold (average revenue or price).

The Relationship Between a Monopolistic Competitive Firm's Marginal Revenue Curve