Which of the following best describes the demand curve faced by a monopolistically competitive producer?

• A. Upward sloping, showing higher quantity demanded at higher prices
• B. Perfectly inelastic, meaning quantity demanded does not change with price
• C. Downward sloping, indicating some market power over price
• D. Perfectly elastic, reflecting no control over price

Answer: (C)

Verified step by step guidance

1. Understand the market structure of monopolistic competition, where many firms sell differentiated products, giving each firm some degree of market power.
2. Recall that a firm with market power faces a demand curve that is downward sloping, meaning it can raise price without losing all customers, but higher prices reduce quantity demanded.
3. Contrast this with perfect competition, where the demand curve faced by an individual firm is perfectly elastic (horizontal), because the firm is a price taker.
4. Recognize that an upward sloping demand curve would imply that higher prices increase quantity demanded, which contradicts the law of demand.
5. Conclude that the demand curve faced by a monopolistically competitive producer is downward sloping, reflecting some control over price but still sensitive to price changes.