In a monopolistically competitive market, demand faced by an individual firm is typically:

• A. downward sloping due to product differentiation
• B. perfectly elastic because of many competitors
• C. perfectly inelastic since firms have market power
• D. upward sloping as prices increase with quantity

Answer: (A)

Verified step by step guidance

1. Understand the nature of monopolistic competition: it is a market structure characterized by many firms selling similar but not identical products, which leads to product differentiation.
2. Recall that product differentiation gives each firm some degree of market power, allowing them to influence the price of their own product.
3. Recognize that because of this market power, the demand curve faced by an individual firm is not perfectly elastic; instead, it is downward sloping, meaning the firm can sell more only by lowering its price.
4. Contrast this with perfect competition, where firms face a perfectly elastic demand curve because products are identical and firms are price takers.
5. Conclude that the demand curve in monopolistic competition slopes downward due to product differentiation, reflecting the firm's ability to set prices above marginal cost.