If a firm under monopolistic competition is producing a quantity that generates MC MR, then the marginal decision rule tells us that profit:
A) can be increased by increasing production.
B) can be increased by decreasing production.
C) can be increased by decreasing the price.
D) is maximized only if MC = P.

Question

If a firm under monopolistic competition is producing a quantity that generates MC > MR, then the marginal decision rule tells us that profit:
A) can be increased by increasing production.
B) can be increased by decreasing production.
C) can be increased by decreasing the price.
D) is maximized only if MC = P.

Quizplus · Accepted Answer

In monopolistic competition, the marginal decision rule states that a firm's profits are maximized where MC = MR. If MC > MR, this means that the firm is producing too much output and incurring additional costs that exceed the additional revenue generated. Therefore, the firm should decrease production to a point where MC = MR to maximize profits.

If a Firm Under Monopolistic Competition Is Producing a Quantity