Which of the following best describes the marginal revenue curve of a monopolistically competitive firm?

• A. It is vertical and does not depend on output.
• B. It lies below the demand curve and slopes downward.
• C. It lies above the demand curve and slopes upward.
• D. It coincides with the demand curve and is horizontal.

Answer: (B)

Verified step by step guidance

1. Recall that a monopolistically competitive firm faces a downward-sloping demand curve because it sells a differentiated product and has some market power.
2. Understand that marginal revenue (MR) is the additional revenue gained from selling one more unit of output, and for a firm with a downward-sloping demand curve, MR decreases as output increases.
3. Recognize that the marginal revenue curve lies below the demand curve because to sell an additional unit, the firm must lower the price not only on the extra unit but also on all previous units sold, reducing the additional revenue gained.
4. Note that the MR curve slopes downward, reflecting the fact that marginal revenue decreases as quantity increases, unlike a perfectly competitive firm where MR is constant and equals price.
5. Conclude that the marginal revenue curve for a monopolistically competitive firm lies below the demand curve and slopes downward, distinguishing it from other market structures.