A firm operating in a monopolistically competitive market is producing a quantity at which MC = MR.Profit:
A)can be increased by increasing production.
B)is maximized.
C)can be increased by decreasing the price.
D)is maximized only if MC = P.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some degree of market power due to product differentiation. As a result, they face a downward-sloping demand curve and are able to set their own prices to some extent. Therefore, the profit-maximizing quantity is where MC = MR, as usual. However, the profit is not maximized at this quantity, but rather at the output level where the price exceeds the average total cost (ATC). This is because in a monopolistically competitive market, firms have some control over price and can charge a markup over their costs. Therefore, producing more or decreasing the price may not necessarily increase profit.

A Firm Operating in a Monopolistically Competitive Market Is Producing