In the long run, a profit-maximizing firm in a monopolistically competitive market operates at
A)efficient scale.
B)a level of output at which average total cost is rising.
C)a level of output at which average total cost is falling.
D)the level of output at which total revenue is maximized.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some market power and can set their prices above marginal cost. However, there are still many competitors offering differentiated products, so the demand for any one firm's product is somewhat elastic. This means that a profit-maximizing firm will produce at the level of output where marginal revenue equals marginal cost, which will typically be a lower output level than the efficient scale. At this level of output, average total cost is falling, which means the firm is experiencing economies of scale. Therefore, the best choice is C, a level of output at which average total cost is falling.

In the Long Run, a Profit-Maximizing Firm in a Monopolistically