If a monopolistically competitive firm's marginal cost increases,then in order to maximize profits,the firm will:
A) reduce output and increase price.
B) increase output and decrease price.
C) increase both output and price.
D) reduce both output and price.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, a firm has some degree of market power, but faces competition from other firms producing similar products. If the marginal cost (MC) of production increases, the firm's profit-maximizing output level will decrease. To maximize profits, the firm will reduce its output and increase its price. This is because, in a monopolistically competitive market, a firm can increase its price without losing all of its customers, since the products of its competitors are not perfect substitutes. By reducing output and increasing price, the firm can maintain some market power and avoid losing too many customers to its competitors.

If a Monopolistically Competitive Firm's Marginal Cost Increases,then in Order