Most firms produce where marginal revenue is equal to marginal cost, but firms in a monopolistically competitive industry instead choose output where average cost is equal to demand.

Question

Quizplus · Accepted Answer

Firms in a monopolistically competitive industry aim to maximize profit by producing at the quantity where marginal revenue equals marginal cost, just like any other firm. However, they differentiate themselves from competitors by producing a product that is slightly different from others in the market, so they also take into account the demand for their specific product when setting prices. This means that they may not necessarily produce where average cost equals demand.

Most Firms Produce Where Marginal Revenue Is Equal to Marginal