You are a manager for a monopolistically competitive firm.From experience,the profit-maximizing level of output of your firm is 100 units.However,it is expected that prices of other close substitutes will fall in the near future.How should you adjust your level of production in response to this change?
A) Produce more than 100 units.
B) Produce less than 100 units.
C) Produce 100 units.
D) Insufficient information to decide.

Question

Quizplus · Accepted Answer

If prices of close substitutes are expected to fall in the near future, it means that consumers will have more options to choose from and may switch to those substitutes instead of your firm's product. As a result, the demand for your product may decrease, and you may not be able to sell as many units as before. In order to maintain profits, it would be wise to produce less than 100 units to match the expected decrease in demand. By reducing output, the firm can maintain a higher price for its product and maximize profits. Therefore, producing less than 100 units is the best choice.

You Are a Manager for a Monopolistically Competitive Firm