A firm in monopolistic competition makes its decisions on quantity and price by
A) taking price as given from the market and producing where MR = MC.
B) taking both price and quantity as given from the market.
C) producing where MR = MC and setting the price for this quantity from the demand curve.
D) taking quantity as given from the market and setting the price for this quantity from the demand curve.
E) producing where MR = MC and setting the price so that P = MR = MC.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power and can set their own prices. However, they are still price sensitive and need to consider the demand curve when making pricing decisions. Therefore, the firm should produce where marginal revenue (MR) equals marginal cost (MC) to maximize profits, and then set the price for this quantity from the demand curve. This is the profit-maximizing combination of price and quantity. Choice A is incorrect because firms in monopolistic competition can influence the market price through their pricing decisions. Choice B is incorrect because firms cannot take both price and quantity as given from the market. Choice D is incorrect because firms cannot take quantity as given from the market, as they have some control over the quantity they produce. Choice E is incorrect because the firm does not necessarily need to set the price equal to marginal revenue and marginal cost at the profit-maximizing quantity.

A Firm in Monopolistic Competition Makes Its Decisions on Quantity