A monopolistically competitive firm maximizes profits when it

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some market power to set their own prices but face competition from other firms producing similar products. Therefore, they maximize profits by producing the quantity at which marginal cost equals marginal revenue, just like in a perfectly competitive market. However, since they have some market power, they can set the price above the marginal cost, but not too high to avoid losing customers to their competitors. Therefore, they use the demand curve to determine the market price that corresponds to the quantity at which marginal cost equals marginal revenue.

A Monopolistically Competitive Firm Maximizes Profits When It