A monopolistically competitive firm chooses the quantity to produce where
A)price equals marginal cost.
B)demand equals marginal cost.
C)marginal revenue equals marginal cost.
D)Both a and c are correct.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, the firm faces a downward-sloping demand curve, meaning it can increase its revenue by decreasing the price or increasing the quantity produced. However, this increase in quantity also incurs higher production costs, resulting in diminishing marginal returns. Therefore, the firm must choose the quantity at which the additional revenue generated (i.e., marginal revenue) from selling one more unit is equal to the additional cost incurred (i.e., marginal cost) from producing one more unit. Thus, the profit-maximizing quantity is where marginal revenue equals marginal cost. Hence, choice C is correct. Choice A is incorrect because the price is higher than marginal cost in a monopolistically competitive market.

A Monopolistically Competitive Firm Chooses the Quantity to Produce Where