A firm in monopolistic competition with a down-sloping demand curve:
A) does not have to worry about price competition due to the nature of its demand curve.
B) can use marginal analysis to help it maximize profits.
C) will have to charge the "market price" which is set by the intersection of industry supply and demand.
D) could use marginal analysis to compare alternatives--but this would not help in pricing because this method focuses on selling one more unit and therefore ignores total profitability.
E) All of the above are true.

Question

Quizplus · Accepted Answer

A firm in monopolistic competition faces a downward-sloping demand curve, which means that it has some control over the price it charges. To maximize profits, the firm should set the price where marginal revenue equals marginal cost, which is where the demand curve intersects with the marginal cost curve. This is where marginal analysis comes in handy, allowing the firm to find the optimal level of production and price. However, the firm cannot ignore price competition entirely, as it still faces competition from other firms in the industry. Therefore, Option A is incorrect. Option C is also incorrect because the firm can charge a price slightly above or below the market price depending on its level of product differentiation. Option D is not entirely accurate because marginal analysis does indeed help in pricing, as it helps to determine the optimal price that maximizes profits. Overall, Option B is the best answer.

A Firm in Monopolistic Competition with a Down-Sloping Demand Curve