Demand and marginal revenue curves are downward sloping for monopolistically competitive firms because:
A) there is free entry and exit.
B) product differentiation allows each firm some degree of monopoly power.
C) there are a few large firms in the industry and each acts as a monopolist.
D) mutual interdependence among all firms in the industry leads to collusion.

Question

Quizplus · Accepted Answer

Monopolistically competitive firms have some degree of market power due to product differentiation, which allows them to charge higher prices. However, they still face competition from other firms producing similar products, so they cannot charge any price they want. As a result, they must lower their price to sell more units, which leads to a downward sloping demand curve. Since marginal revenue is the change in revenue from producing one more unit, it also decreases as more units are produced, leading to a downward sloping marginal revenue curve.

Demand and Marginal Revenue Curves Are Downward Sloping for Monopolistically