A New Keynesian firm produces the output at which
A)marginal revenue equals zero.
B)marginal cost equals zero.
C)its selling price equals marginal cost.
D)marginal revenue equals marginal cost.

Question

Quizplus · Accepted Answer

In a New Keynesian model, firms are assumed to have some market power, so they can set their own prices. However, they also face a downward-sloping demand curve. As a result, the firm will want to set its price such that the marginal revenue (the additional revenue it earns from selling one more unit) equals its marginal cost (the additional cost of producing one more unit), which yields the highest profit. Therefore, D is the best choice.

A New Keynesian Firm Produces the Output at Which