A monopolistically competitive firm faces the following demand schedule for its product: The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with

Question

A monopolistically competitive firm faces the following demand schedule for its product:  The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with

Quizplus · Accepted Answer

To maximize profit, the firm should produce where marginal revenue (MR) equals marginal cost (MC).

To find MR, we can use the formula:

MR = price*(1 - 1/elasticity of demand)

At 15 units of output, the price is $14 and the elasticity of demand is -2. So:

MR = $14*(1 - 1/-2) = $21

At 15 units of output, MC is $3.

Therefore, the firm should produce 15 units of output to maximize profit. This is where MR = MC = $21.

A Monopolistically Competitive Firm Faces the Following Demand Schedule for Its