You are a manager for a monopolistically competitive firm.From experience, the profit-maximizing level of output of your firm is 100 units.However, it is expected that prices of other close substitutes will fall in the near futurHow should you adjust your level of production in response to this change?
A)Produce more than 100 units.
B)Produce less than 100 units.
C)Produce 100 units.
D)Insufficient information to decide.

Question

Quizplus · Accepted Answer

With the expected fall in prices of close substitutes, demand for the firm's product is likely to decrease, making it more difficult to sell the same quantity of output at the same price. To maintain profitability, the firm will need to either reduce costs or lower the quantity produced. Given that the profit-maximizing output level is already at 100 units, it is reasonable to assume that reducing output is the best option. This will enable the firm to achieve a higher price per unit and maximize profits in the face of increased competition.

You Are a Manager for a Monopolistically Competitive Firm