Figure: Profit Maximization in Monopolistic Competition (Figure: Profit Maximization in Monopolistic Competition) Look at the figure Profit Maximization in Monopolistic Competition.A firm in monopolistic competition will maximize profits by producing the level of output at which:
A)P = MC.
B)MR = MC.
C)P = MR.
D)price minus ATC (i.e., economic profit per unit) is the largest.

Question

Figure: Profit Maximization in Monopolistic Competition  (Figure: Profit Maximization in Monopolistic Competition) Look at the figure Profit Maximization in Monopolistic Competition.A firm in monopolistic competition will maximize profits by producing the level of output at which:
A)P = MC. 
B)MR = MC. 
C)P = MR. 
D)price minus ATC (i.e., economic profit per unit) is the largest.

Quizplus · Accepted Answer

In monopolistic competition, the demand curve faced by the firm is downward sloping, meaning that in order to increase their level of output, they must lower their price. Therefore, the marginal revenue curve (MR) will lie below the demand curve. The profit maximizing level of output occurs where MR = MC, as producing any further units would result in higher costs than revenues earned, and producing fewer units would mean leaving potential profits on the table. Therefore, choice B is the correct answer. Choice A is incorrect as it assumes that the demand curve faced by the firm is perfectly elastic, which is not the case in monopolistic competition. Choice C is incorrect as it assumes that the firm can set any price it wants, which is also not the case under monopolistic competition. Choice D is incorrect as it only considers economic profit per unit, while the firm is concerned with overall profits.