Firm X is a monopolistic competitive firm and a factor price taker. For this firm at the profit-maximizing factor quantity,

Question

Quizplus · Accepted Answer

As a monopolistic competitive firm, Firm X has some market power to set its price, but it still faces competition from other firms. This means that it is a price maker for its product, but a price taker for its factors of production. At the profit-maximizing factor quantity, Firm X should produce where VMP (value of the marginal product) equals MFC (marginal factor cost). Since it is a factor price taker, the factor price will be equal to MFC. Therefore, if VMP is greater than MRP (marginal revenue product), the firm should hire more factors of production to increase its profits. However, if VMP is less than MRP, the firm should decrease its usage of factors to maximize its profits. In this case, since the firm is a monopolistic competitor and has some market power, it is likely that VMP will be greater than MRP, but the factor price will still be equal to MFC. Therefore, the correct answer is C: VMP > MRP = MFC = factor price.

Firm X Is a Monopolistic Competitive Firm and a Factor