Suppose a monopolistically competitive firm can increase its profits by decreasing its output.At the current output:
A)marginal revenue is less than zero.
B)price is less than marginal revenue.
C)marginal revenue is less than marginal cost.
D)price is less than average total cost.

Question

Quizplus · Accepted Answer

In monopolistic competition, the firm has some market power but faces competition. Therefore, if the firm were to decrease its output, it would be able to raise the price of its product. However, because there are still close substitutes available, the firm cannot raise the price too high or it will lose too many customers to its competitors. As a result, the marginal revenue of the firm will be less than the price. Since the firm's goal is to maximize profits, it will produce the quantity of output where marginal revenue equals marginal cost. If the firm were to decrease its output, this would mean that the marginal cost of producing the last unit is less than the marginal revenue of selling that unit (otherwise the firm would already be producing less). Therefore, if the firm were to decrease its output, the marginal revenue would be less than the marginal cost.

Suppose a Monopolistically Competitive Firm Can Increase Its Profits by Decreasing