A monopolistically competitive firm's demand curve slopes downward because:
A)other firms are free to enter the market.
B)there are a large number of firms in the market.
C)a differentiated product gives the firm some monopoly power.
D)the firm has complete information about the market.
E)the firm sells a standardized product.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms sell differentiated products, which give them some degree of monopoly power. Consumers may consider the products of one firm to be slightly different from those of another firm, meaning that they may not be perfect substitutes for each other. As a result, each firm faces a downward-sloping demand curve as it adjusts its price, recognizing that consumers are generally willing to pay more for its differentiated product than for its competitors' products. A and B are incorrect because the presence of a large number of firms or the potential for other firms to enter the market does not alone lead to a downward-sloping demand curve. D is incorrect because having complete information about the market does not affect the shape of the demand curve. E is incorrect because a standardized product would imply a perfectly elastic demand curve, not a downward-sloping one.

A Monopolistically Competitive Firm's Demand Curve Slopes Downward Because