The demand equation for a good produced by a monopolistically competitive firm is P = 10 - Q. If the firm's marginal cost is a constant $2 per unit, what price will it charge and how many units will it produce if it maximizes its profits?
A) $8 and two units
B) $7 and three units
C) $6 and four units
D) $5 and five units

Question

Quizplus · Accepted Answer

To maximize profits, the monopolistically competitive firm will produce at the point where marginal revenue (MR) equals marginal cost (MC). 
MR is the change in total revenue from selling one more unit, which for this firm is: MR = P(1 - 1/2Q).
So, setting MR equal to MC ($2), we get:
10 - Q = 2(1 - 1/2Q)
Solving for Q, we get Q = 4. 
Plugging Q = 4 into the demand equation gives us the price: P = 10 - Q = $6.
Therefore, the monopolistically competitive firm will charge a price of $6 and produce four units to maximize its profits.

The Demand Equation for a Good Produced by a Monopolistically