A monopolistically competitive firm maximizes profits in the short run

Question

Quizplus · Accepted Answer

A monopolistically competitive firm will maximize profits in the short run by producing the quantity of output where marginal revenue (MR) equals marginal cost (MC) as long as the price (P) is greater than average variable cost (AVC). This is because producing any quantity where P is less than AVC will result in bigger losses than shutting down. Equating MC with P instead of MR will not result in maximizing profits. Maximizing total revenue is not the same as maximizing profits as it does not take into account costs. Equating P with ATC will result in just breaking even, not maximizing profits.

A Monopolistically Competitive Firm Maximizes Profits in the Short Run