Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By producing where marginal cost equals marginal revenue
B
By setting prices above average total cost
C
By maximizing total revenue regardless of costs
D
By producing where average total cost is minimized
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, firms determine their optimal output level by looking at where their marginal cost (MC) equals their marginal revenue (MR). Marginal cost is the cost of producing one more unit, while marginal revenue is the income from selling that additional unit. To maximize profits, a firm will increase production until the cost of making one more product is the same as the money earned from selling it. For example, if a coffee shop finds that making one more cup of coffee costs $2 and selling it brings in $3, it will keep producing until the extra profit from that cup no longer exceeds the cost. This balance helps the firm operate efficiently while also competing with others in the market.
Detailed Explanation
Firms find the best amount to produce by looking at where their costs to make one more item equal the money they earn from selling that item. Other options are incorrect because Some might think that just charging more than what it costs to make a product is enough; It's a common mistake to think that making as much money as possible is the goal.
Key Concepts
Monopolistic Competition
Marginal Cost and Revenue
Pricing Power
Topic
Monopolistic Competition Analysis
Difficulty
easy level question
Cognitive Level
understand
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