If a monopolistically competitive firm is producing the profit-maximizing level of output and is earning an economic profit in the short run:

Question

Quizplus · Accepted Answer

If a monopolistically competitive firm is producing the profit-maximizing level of output and earning an economic profit in the short run, then marginal revenue must equal marginal cost. This is because the profit-maximizing level of output occurs where marginal revenue equals marginal cost. Since the firm is earning an economic profit, this means that price is greater than average total cost, so answers A and B are incorrect. Additionally, since the firm is producing a positive quantity of output, it cannot be the case that marginal revenue is less than marginal cost (answer C).

If a Monopolistically Competitive Firm Is Producing the Profit-Maximizing Level