2. In the short-run, a profit-maximizing monopolistically competitive firm sets it price:
A. equal to marginal revenue.
B. equal to marginal cost.
C. above marginal cost.
D. below marginal cost.

Question

2.    In the short-run, a profit-maximizing monopolistically competitive firm sets it price:
A.    equal to marginal revenue.
B.    equal to marginal cost.
C.    above marginal cost.
D.    below marginal cost.

BlackTom AI · Accepted Answer

First, we restate the scenario to set the stage: a monopolistically competitive firm in the short run aims to maximize profit by choosing output where marginal revenue equals marginal cost, and then sets the price based on the demand at that output level.
Option A: 'equal to marginal revenue.' In a typical monopolistically competitive setting, the firm faces a downward-sloping demand curve, so marginal revenue is less than price. The profit-maximizing rule is MR = MC, not P = MR. Therefore, pricing at MR would not generally maximize profit.
Option B: 'equal to marginal cost.' This would imply P = MC, which holds in perfect competition in the long run under zero economic profit, but not for a monopolistically competitive firm in the short run. In the short run with downward-sloping demand, the price exceeds MC at the chosen output because the firm has some market power and faces a price that consumers are willing to pay given the quantity—and MR = MC determines quantity, not price.
Option C: 'above marginal cost.' This aligns with the standard outcome for a monopolistically competitive firm: after choosing the profit-maximizing quantity where MR = MC, the price on the demand curve is set above MC, reflecting the market power and the downward-sloping demand. Hence, P > MC in the short run.
Option D: 'below marginal cost.' Pricing below MC would imply negative contribution to fixed costs and is never profit-maximizing in normal conditions, as the firm would lose more on the last unit than it would cover by the additional revenue. This is inconsistent with profit-maximization.
In summary, the key ideas are: profit-maximization occurs where MR = MC, and the price determined from the demand schedule at that quantity ends up above MC due to the monopolistic market power and the downward-sloping demand curve. The other options conflict with these core principles by equating price to MR, price to MC, or pricing below MC, each of which does not yield the profit-maximizing outcome for a monopolistically competitive firm.

ECNM1116.36617.202230 Practice Quiz Monopolistic Competition

2. In the short-run, a profit-maximizing monopolistically competitive firm sets it price: A. equal to marginal revenue. B. equal to marginal cost. C. above marginal cost. D. below marginal cost.

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