The profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which
A)marginal revenue equals marginal cost.
B)average revenue exceeds marginal cost by the greatest amount.
C)price equals marginal cost.
D)average revenue equals average total cost.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some market power but face competition from similar products. This means that the demand curve is downward sloping, but not perfectly elastic. In order to maximize profits, a monopolistically competitive firm should produce the quantity at which marginal revenue equals marginal cost. This is because, at any other quantity, the firm could increase profits by producing more if marginal revenue is greater than marginal cost or reduce losses by producing less if marginal revenue is less than marginal cost. Therefore, the profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which marginal revenue equals marginal cost.

The Profit-Maximizing Rule for a Monopolistically Competitive Firm Is to Select