Which of the following is true about firms in monopolistic competition?

• A. They produce identical products.
• B. There are significant barriers to entry.
• C. They are price takers.
• D. They face a downward-sloping demand curve.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: many firms, differentiated products, free entry and exit, and some control over price.
2. Recall that in monopolistic competition, firms produce products that are similar but not identical, meaning products are differentiated rather than identical.
3. Recognize that there are low or no significant barriers to entry in monopolistic competition, allowing new firms to enter the market freely.
4. Know that firms in monopolistic competition are not price takers because they have some market power due to product differentiation; thus, they face a downward-sloping demand curve.
5. Conclude that the correct statement is that firms in monopolistic competition face a downward-sloping demand curve, reflecting their ability to set prices above marginal cost.