The monopolistically competitive firm maximises short-run profit by following which of these rules?
A) MC = Demand.
B) MC = P.
C) MC = MR.
D) MC MR.

Question

The monopolistically competitive firm maximises short-run profit by following which of these rules?
A) MC = Demand.
B) MC = P.
C) MC = MR.
D) MC > MR.

Quizplus · Accepted Answer

A monopolistically competitive firm maximizes short-run profit by producing where marginal revenue (MR) equals marginal cost (MC). While MC=MR is the rule that maximizes profit, a monopolistically competitive firm cannot price at the point where MC=MR because, in this case, the price is below the average total cost, resulting in a loss. Therefore, the firm chooses the level of output where MC=price (or P) to maximize short-run profit. However, this may lead to excess capacity in the long run as the firm is not producing at the minimum point of the average total cost curve.

The Monopolistically Competitive Firm Maximises Short-Run Profit by Following Which