Which of the following best describes how a monopolistic competitor wishing to maximize profit will choose its output and price?

• A. Produce the quantity where price equals marginal cost and set price equal to marginal cost.
• B. Produce the quantity where marginal cost is greater than marginal revenue and set price below marginal cost.
• C. Produce the quantity where marginal cost equals marginal revenue and set price above marginal cost.
• D. Produce the quantity where marginal revenue equals average cost and set price equal to average cost.

Answer: (C)

Verified step by step guidance

1. Understand that a monopolistic competitor maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is a fundamental rule for profit maximization in many market structures.
2. Recognize that unlike a perfect competitor, a monopolistic competitor faces a downward-sloping demand curve, so the price (P) is greater than marginal revenue (MR) at the profit-maximizing output.
3. Since MR = MC determines the quantity, find the output level where the firm's marginal revenue curve intersects its marginal cost curve.
4. At this output level, determine the price by looking at the demand curve (or average revenue curve) corresponding to that quantity. This price will be above marginal cost because the firm has some market power.
5. Conclude that the monopolistic competitor sets price above marginal cost and produces where MR = MC to maximize profit, which differentiates it from perfect competition where P = MC.