In a monopolistically competitive industry:
A)a firm maximizes profits when MR = MC yet P MC.
B)people would be better off if output were reduced.
C)output could be increased without an increase in total cost.
D)to maximize profits,firms set MR = MC,and people would be better off if output were reduced.

Question

In a monopolistically competitive industry:
A)a firm maximizes profits when MR = MC yet P > MC.
B)people would be better off if output were reduced.
C)output could be increased without an increase in total cost.
D)to maximize profits,firms set MR = MC,and people would be better off if output were reduced.

Quizplus · Accepted Answer

In a monopolistically competitive industry, firms have some market power which allows them to charge a price above their marginal cost. However, they cannot charge too high of a price as there are close substitutes available. Therefore, firms will maximize profits at the point where marginal revenue (MR) equals marginal cost (MC), but the price (P) they charge will be higher than MC. This is shown as point E in the graph below:

Output could be increased without an increase in total cost (choice C) is not necessarily true, as increasing output might require firms to purchase more inputs and therefore incur higher costs. People being better off if output were reduced (choice B) is also not true, as consumers in monopolistically competitive markets value product differentiation and variety, which is provided by having a larger selection of firms and products.

Therefore, the correct answer is A.

In a Monopolistically Competitive Industry