In the short run, a profit-maximizing monopolistically competitive firm sets it price
A) equal to marginal revenue.
B) equal to marginal cost.
C) above marginal cost.
D) below marginal cost.

Question

Quizplus · Accepted Answer

In the short run, a profit-maximizing monopolistically competitive firm sets its price above marginal cost. This is because the firm has some degree of market power and can charge a price that is higher than the cost of producing one more unit in order to earn positive economic profits. However, the firm must also consider the price sensitivity of its customers and the potential for new firms to enter the market in the long run, which will reduce its market power and erode its profits.

In the Short Run, a Profit-Maximizing Monopolistically Competitive Firm Sets