In monopolistic competition, a firm chooses:

• A. the price and quantity where marginal revenue equals marginal cost
• B. to set price equal to marginal cost
• C. to produce at the minimum point of its average total cost curve
• D. the quantity where price equals average variable cost

Answer: (A)

Verified step by step guidance

1. Understand the nature of monopolistic competition: firms have some market power due to product differentiation, so they face a downward-sloping demand curve and can set prices above marginal cost.
2. Recall the profit-maximizing condition for any firm with market power: the firm chooses the quantity where marginal revenue (MR) equals marginal cost (MC), i.e., \(\text{MR} = \text{MC}\).
3. Recognize that unlike perfect competition, firms in monopolistic competition do not set price equal to marginal cost; instead, price is set above marginal cost because the demand curve is downward sloping.
4. Note that producing at the minimum point of average total cost (ATC) is characteristic of perfect competition in the long run, not monopolistic competition, where excess capacity usually exists.
5. Conclude that the firm chooses the price and quantity where marginal revenue equals marginal cost, then uses the demand curve to find the corresponding price.