Which of the following best describes the perceived demand curve faced by a monopolistic competitor?

• A. It is upward sloping, indicating that higher prices lead to higher quantities sold.
• B. It is perfectly inelastic, meaning the firm can sell any quantity at any price.
• C. It is perfectly elastic, meaning the firm can sell any quantity at the market price.
• D. It is downward sloping, indicating that the firm can raise price only by reducing quantity sold.

Answer: (D)

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 the demand curve faced by a firm in monopolistic competition is not perfectly elastic because the products are not perfect substitutes; consumers will buy less if the price rises, but not zero.
3. Recognize that the demand curve is downward sloping, meaning that to sell a larger quantity, the firm must lower its price, and conversely, raising the price will reduce the quantity demanded.
4. Contrast this with perfect competition, where the demand curve is perfectly elastic (horizontal), and monopoly, where the demand curve is also downward sloping but the firm is the sole seller.
5. Conclude that the best description of the perceived demand curve for a monopolistic competitor is downward sloping, indicating a trade-off between price and quantity sold.