In a monopolistically competitive market, what determines the equilibrium price when firms are maximizing profits, and how does this relate to market efficiency?

In a monopolistically competitive market, firms set their prices based on the demand for their unique products and their cost of production. When firms maximize profits, they choose a price where their marginal cost, or the cost of making one more unit, equals their marginal revenue, which is the additional income from selling that unit. For example, if a coffee shop finds that selling one more cup adds $3 to its revenue but costs $2 to make, it will continue to sell until those two amounts are equal. However, because firms have some control over their prices due to product differentiation, they don’t achieve the same level of efficiency as firms in perfect competition. This means that while they can earn profits, the market may not produce the best outcome for consumers, leading to higher prices and less quantity available compared to a perfectly efficient market.