Compared to the outcome under a marginal cost pricing strategy,a monopolistically competitive firm will produce a
A)Lower output and charge a higher price.
B)Greater output and charge a higher price.
C)Lower output and charge a lower price.
D)Greater output and charge a lower price.

Question

Quizplus · Accepted Answer

Since a monopolistically competitive firm has market power and faces a downward sloping demand curve, it can charge a price above its marginal cost. This implies that the firm will choose to produce less output than it would under a marginal cost pricing strategy, resulting in a lower output level. At the same time, the firm will charge a higher price than the marginal cost pricing level, based on its ability to differentiate its product from its competitors. Therefore, the correct choice is A.

Compared to the Outcome Under a Marginal Cost Pricing Strategy,a