A firm in monopolistic competition with a down-sloping demand curve:
A) does not have to worry about price competition due to the nature of its demand curve.
B) can use marginal analysis to help it maximize profits.
C) will have to charge the "market price" which is set by the intersection of industry supply and demand.
D) could use marginal analysis to compare alternatives-but this would not help in pricing because this method focuses on selling one more unit and therefore ignores total profitability.
E) None of these alternatives is correct.

Question

Quizplus · Accepted Answer

A firm in monopolistic competition with a down-sloping demand curve can use marginal analysis to help it maximize profits. Marginal analysis examines the costs and benefits of producing and selling one more unit of output. By comparing the marginal cost and marginal revenue of producing an additional unit, a firm can determine the optimal quantity to produce and the corresponding price to charge. This allows the firm to maximize profits in the short run. However, in the long run, other firms may enter the market and erode the firm's market power, limiting its ability to charge high prices and earn economic profits.

A Firm in Monopolistic Competition with a Down-Sloping Demand Curve