Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms,
A)marginal revenue will equal average total cost.
B)price will exceed marginal cost.
C)marginal cost will exceed average revenue.
D)average variable cost will be declining.

Question

Quizplus · Accepted Answer

In monopolistically competitive markets, firms have some control over price due to product differentiation, but they still face competition from other firms with similar products. Thus, in order to maximize profits, they will produce where marginal revenue equals marginal cost, but they will charge a price higher than their marginal cost in order to capture some of the consumer surplus created by their unique product. Therefore, B is the correct answer as price will exceed marginal cost.

Product Differentiation in Monopolistically Competitive Markets Ensures That, for Profit-Maximizing