Which of the following best describes the relationship between the demand curve and the marginal revenue curve for a profit-maximizing monopolistic competitor?

• A. The marginal revenue curve lies above the demand curve and is upward sloping.
• B. The marginal revenue curve is vertical while the demand curve is downward sloping.
• C. The marginal revenue curve coincides with the demand curve and is horizontal.
• D. The marginal revenue curve lies below the demand curve and is downward sloping.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of the demand curve for a monopolistic competitor. It is typically downward sloping because the firm faces a downward sloping demand for its differentiated product, meaning it must lower price to sell more units.
2. Step 2: Recall the definition of marginal revenue (MR), which is the additional revenue gained from selling one more unit of output. For a firm with a downward sloping demand curve, MR is not equal to price because lowering price to sell an additional unit affects revenue from all previous units sold.
3. Step 3: Recognize that the marginal revenue curve lies below the demand curve for a monopolistic competitor. This happens because the firm must reduce the price on all units sold to increase quantity, so MR decreases faster than price.
4. Step 4: Note that both the demand curve and the marginal revenue curve are downward sloping, but the MR curve has twice the slope of the demand curve, making it steeper and always below the demand curve except at the first unit sold.
5. Step 5: Conclude that for a profit-maximizing monopolistic competitor, the marginal revenue curve lies below the demand curve and is downward sloping, which is essential for determining the profit-maximizing output where MR equals marginal cost.