The following figure shows the demand and cost curves faced by a monopolistic competitor.

-Refer to the figure above.The optimal price charged by the monopolistic competitor is ________.

Question

The following figure shows the demand and cost curves faced by a monopolistic competitor.
 
-Refer to the figure above.The optimal price charged by the monopolistic competitor is ________.

Quizplus · Accepted Answer

The monopolistic competitor will set the price where marginal revenue (MR) equals marginal cost (MC), which occurs at point E. At this point, the monopolistic competitor will charge a price of P2. Charging a higher price would result in a lower quantity sold and therefore lower revenue, while charging a lower price would result in higher quantity sold, but also higher costs and lower profits. Therefore, P2 is the optimal price.

The Following Figure Shows the Demand and Cost Curves Faced