A monopolistically competitive firm has a:

• A. horizontal marginal revenue curve
• B. downward-sloping demand curve due to product differentiation
• C. perfectly elastic demand curve like a firm in perfect competition
• D. single product with no close substitutes

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of a monopolistically competitive firm. Such a firm sells products that are differentiated from one another, meaning each firm's product is slightly different from its competitors'.
2. Step 2: Recognize that because of product differentiation, the demand curve faced by a monopolistically competitive firm is downward sloping. This means the firm can raise its price without losing all its customers, unlike in perfect competition.
3. Step 3: Recall that a horizontal marginal revenue (MR) curve implies a perfectly elastic demand curve, which is characteristic of a perfectly competitive firm, not a monopolistically competitive one.
4. Step 4: Note that a perfectly elastic demand curve means the firm is a price taker, which contradicts the product differentiation in monopolistic competition where firms have some price-setting power.
5. Step 5: Conclude that the correct description for a monopolistically competitive firm is that it has a downward-sloping demand curve due to product differentiation, rather than a horizontal MR curve or perfectly elastic demand.