Clyde’s Pet Shop is profit maximising firm that operates in a monopolistically competitive industry, Clyde just introduced a goldfish as a new product, and is trying to set the price per dozen goldfish. Which of the following should Clyde consider when pricing the goldfish?

Question

BlackTom AI · Accepted Answer

Pricing decisions in a monopolistically competitive setting hinge on how output is chosen and how price is then set from the demand facing the firm.
Option a: 'Clyde should consider his average total cost, which determines the level of output and profit.' While average total cost matters for profitability and break-even analysis, it does not by itself determine the optimal output in imperfect competition. The key driver is marginal analysis (MC and MR) to choose output, and then price is derived from the demand at that output. Relying solely on ATC ignores the marginal revenue and the shape of the demand curve and can lead to suboptimal profits or even losses if MR ≠ MC.
Option b: 'Clyde should consider his marginal cost and marginal revenue, which determine the level of output, and the level of output determines the price.' This captures the core principle of profit maximization in imperfect competition: set output where MR = MC, then use the demand curve at that output to determine the price. It aligns with the standard approach in monopolistic competition where firms face downward-sloping demand and use marginal analysis to decide quantity before pricing.
Option c: 'Clyde should take the price from the industry price, as do perfectly competitive firms.' In perfect competition, price is given by the market, and firms are price takers. In monopolistic competition, each firm has some market power and faces a downward-sloping demand curve; it cannot simply adopt the industry price. This would ignore product differentiation and the firm’s own demand.
Option d: 'Clyde should consider the actions of his competitors' While competitive actions are relevant in a competitive environment, the monopolistically competitive setting emphasizes the firm’s own marginal conditions (MR and MC) and the demand it faces. Competitors’ actions can influence demand, but the primary decision rule for output and price rests on MR = MC and the corresponding price from the demand schedule, not on headlines about competitors alone.

MCD2020 - T1 - 2025 Homework Quiz 9 - Monopolistic Competition and Oligopoly

Clyde’s Pet Shop is profit maximising firm that operates in a monopolistically competitive industry, Clyde just introduced a goldfish as a new product, and is trying to set the price per dozen goldfish. Which of the following should Clyde consider when pricing the goldfish?

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