Firms in a monopolistically competitive market structure maximize their profit by producing an output where

Question

Quizplus · Accepted Answer

Firms in monopolistically competitive markets aim to differentiate their products to create a perceived difference in quality, branding, or other features, which means that the demand curve they face is downward sloping. Thus, to maximize profits, firms in monopolistically competitive markets produce where marginal revenue (MR) equals marginal cost (MC). This is because if MR is greater than MC, a firm can increase profits by producing more. But if MC is greater than MR, a firm can increase profits by producing less. Therefore, D is the correct answer.

Firms in a Monopolistically Competitive Market Structure Maximize Their Profit