Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By setting a price equal to marginal cost
B
By equating marginal revenue to marginal cost
C
By maximizing total revenue
D
By following the price set by competitors
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistic market structure, a single firm controls the entire market for a specific product or service. This firm has the power to set its prices because there are no direct competitors. To determine its equilibrium price, the firm looks at the demand for its product and its cost of production. It will find the price that maximizes its profits, which is where its marginal cost of producing an additional unit equals the marginal revenue it earns from selling that unit. For example, if a monopolistic company sells unique handmade shoes, it will adjust its price based on how many shoes people want to buy at different prices, ensuring it covers costs while maximizing earnings.
Detailed Explanation
A monopolistic firm sets its price where its extra income from selling one more unit (marginal revenue) equals the extra cost of making that unit (marginal cost). Other options are incorrect because Some might think a firm sets price equal to its costs; Maximizing total revenue sounds good, but it doesn't consider costs.
Key Concepts
Market power
Equilibrium price
Topic
Market Structures Overview
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.