A firm operating under monopolistic competition can increase its total welfare by setting prices below the equilibrium level, as this would eliminate deadweight loss and enhance allocative efficiency.

In a monopolistically competitive market, firms often have some control over their prices, which can lead to a situation known as deadweight loss. This occurs when the quantity of goods produced is less than what is socially optimal, meaning some consumers who want the product at a lower price cannot buy it. By setting prices below the equilibrium level, a firm can attract more customers, increase sales, and produce more goods, which helps reduce this deadweight loss. For example, if a coffee shop lowers its price, more people might choose to buy coffee, leading to higher total sales and a better allocation of resources in the market. This way, not only does the firm benefit from increased sales, but society as a whole enjoys greater overall welfare.