A monopolistically competitive firm is producing an output level at which marginal revenue is greater than marginal cost.This firm should __________ quantity and __________ price to increase profit or reduce losses.
A)increase, increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
E)increase; not change

Question

Quizplus · Accepted Answer

If the firm's marginal revenue is greater than its marginal cost, it means that the firm can increase its profit by producing and selling more units. Therefore, it should increase its quantity. However, because the firm is operating in a monopolistically competitive market, it cannot simply increase its price without losing customers to its competitors. This is because there are close substitutes available in this type of market structure. Therefore, the firm should decrease its price to attract more customers and increase its sales, which will ultimately lead to higher profits.

A Monopolistically Competitive Firm Is Producing an Output Level at Which