Refer to Figure 16-2. In a monopolistically competitive market, at what price will the firm charge for its product?

• A. At the price corresponding to the quantity where marginal revenue equals marginal cost, as indicated on the demand curve
• B. At the price where marginal revenue equals average total cost
• C. At the price where average total cost equals marginal cost
• D. At the price where the firm's demand curve intersects its marginal cost curve

Answer: (A)

Verified step by step guidance

1. Understand that in a monopolistically competitive market, the firm maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is the fundamental profit-maximizing condition: \(\text{MR} = \text{MC}\).
2. Identify the quantity on the graph where the MR curve intersects the MC curve. This quantity represents the profit-maximizing output level for the firm.
3. Once the profit-maximizing quantity is found, move vertically up to the demand curve to find the price consumers are willing to pay for that quantity. This price is determined by the demand curve at the chosen quantity.
4. Recognize that the price charged by the firm is not where MR equals average total cost (ATC), nor where ATC equals MC, nor where the demand curve intersects the MC curve. Instead, it is the price on the demand curve corresponding to the MR = MC quantity.
5. Summarize that the firm sets its price based on the demand curve at the quantity where MR equals MC, ensuring profit maximization in monopolistic competition.