A monopolistically competitive firm maximizes profits or minimizes losses in the short run by
A)Setting price equal to marginal cost.
B)Producing at the output level where ATC is minimized.
C)Producing at the output level where MR equals MC.
D)Producing at the output level where MC equals ATC.

Question

Quizplus · Accepted Answer

In the short run, a monopolistically competitive firm maximizes profits or minimizes losses by producing where marginal revenue equals marginal cost (MR=MC) because at that output level the firm can increase revenue by producing additional units without increasing cost. However, this may result in a price that is different from marginal cost and may also result in losses if the price is below average total cost. Thus, option A is incorrect. Option B is also incorrect because the firm may not be producing at a level where ATC is minimized due to product differentiation and other factors affecting costs. Finally, option D is incorrect because a firm can produce where MC equals ATC only in the long run when all costs are variable.

A Monopolistically Competitive Firm Maximizes Profits or Minimizes Losses in the Short