Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By producing where total cost is minimized
B
By setting prices equal to average cost
C
By producing where marginal revenue equals marginal cost
D
By maximizing total revenue regardless of costs
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, a firm determines the optimal output level for profit maximization by comparing its marginal cost to its marginal revenue. Marginal cost is the cost of producing one more unit, while marginal revenue is the additional income from selling that unit. The firm will continue to produce more output as long as the marginal revenue from selling an extra unit is greater than the marginal cost of producing it. When these two values are equal, the firm has found its optimal output level, where it can maximize profits. For example, if a restaurant finds that serving one more meal increases its revenue by $10 but costs $8 to make, it should produce that meal because it adds to its profit.
Detailed Explanation
A firm maximizes profit by producing where marginal revenue equals marginal cost. Other options are incorrect because Some might think that minimizing total cost is the best way to make money; Setting prices equal to average cost seems logical, but it doesn't guarantee profit.
Key Concepts
Marginal Revenue and Marginal Cost
Monopolistic Competition
Profit Maximization
Topic
Profit Maximization Techniques
Difficulty
medium level question
Cognitive Level
understand
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