In monopolistic competition, profit is maximised by producing so that marginal revenue
A) is negative.
B) equals marginal cost and which are less than price.
C) equals marginal cost and equals price.
D) equals average total cost but not marginal cost.
E) equals price.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some market power to set prices. However, they also face competition from similar but differentiated products. Therefore, the profit-maximizing output level is where marginal revenue equals marginal cost, just like in perfect competition. However, since the firm has some market power, the price will be set above marginal cost. Therefore, producing at marginal cost and a price lower than what the market is willing to pay will not maximize profit. Likewise, producing at a price equal to marginal cost will not generate any profit. Therefore, the best choice is producing where marginal revenue equals marginal cost and which are less than price.

In Monopolistic Competition, Profit Is Maximised by Producing So That