Which of the following statements is true?

• A. A monopolistically competitive firm's demand curve is equal to the market demand curve.
• B. For a monopolistically competitive firm, an increase in the quantity sold will always increase total revenue.
• C. The barriers to market entry in perfect competition are more stringent than those for monopolistic competition.
• D. A monopolistically competitive firm's marginal revenue is less than its average revenue.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive market: Many firms, differentiated products, and free entry and exit.
2. Recall that in monopolistic competition, each firm faces a downward-sloping demand curve due to product differentiation, unlike perfect competition where firms are price takers.
3. Recognize that for a monopolistically competitive firm, the marginal revenue (MR) is less than the price (or average revenue, AR) because the firm must lower the price to sell additional units, which affects all units sold.
4. Analyze why the statement 'A monopolistically competitive firm's marginal revenue is less than its average revenue' is true: As the firm sells more, the price effect on existing units causes MR to be less than AR.
5. Compare this with perfect competition, where MR equals AR, and understand that the presence of product differentiation in monopolistic competition leads to the MR being less than AR.