At a price of $8, the marginal revenue of a monopolistically competitive firm is $5. If the marginal cost is $7 and average total cost is $4, what should the firm do to maximize profits?
A) reduce output and increase price
B) increase output and decrease price
C) reduce both output and price
D) increase both output and price

Question

Quizplus · Accepted Answer

To maximize profits, the firm should produce where marginal cost equals marginal revenue. Since marginal cost ($7) is greater than marginal revenue ($5), the firm should reduce output to increase marginal revenue. Reducing output typically allows the firm to increase price in a monopolistically competitive market.

At a Price of $8, the Marginal Revenue of a Monopolistically