Both statements are correct, and the reason explains the assertion — option 1.

Why the demand curve slopes downward. Under monopolistic competition each firm sells a differentiated product — distinguished by brand, packaging, quality, service or location. Differentiation gives the firm a small degree of market power, so it is a price maker to a limited extent, and raising its price does not lose it every customer at once. That is what a downward-sloping demand curve means.

Why it is more elastic than a monopolist’s — and this is exactly what R supplies. A monopolist has no close substitutes: a buyer who dislikes the price has nowhere else to go, so demand responds relatively little. Under monopolistic competition there are many close substitutes, differentiated but broadly interchangeable. A price rise therefore drives a large number of buyers to rival brands, and demand is correspondingly sensitive. The availability of close substitutes is the cause of the greater elasticity, so R is a correct explanation of A, not merely a true statement standing beside it.

The underlying principle. Elasticity of demand depends above all on the availability of substitutes. The more and the closer the substitutes, the flatter the demand curve. Perfect competition is the limiting case — perfect substitutes, infinite elasticity; monopoly the other extreme.

The consequence for the firm. Because demand is elastic, a monopolistically competitive firm cannot raise price far without losing volume, and in the long run free entry erodes supernormal profit until price equals average cost — but at an output below the minimum of the average cost curve, leaving excess capacity, which is the characteristic inefficiency of the form. This is the theory of Edward Chamberlin and Joan Robinson.

Hence, the answer is option 1.