Chapter 12R, Problem 17MCQ

To determine

The correct option that defines the way by which quantity and prices can be selected for maximization of profit.

Answer to Problem 17MCQ

Option b is correct.

Explanation of Solution

Explanation for correct option:

b.

To determine the level of output in monopolistic competition, firm needs to select the output level at which MR =MC. In the given graph, at Q2, MR =MC. Then the prices are chosen at the selected output level on demand curve. It is at point P5 demand curve meets the condition of MR =MC. Therefore, option b is correct.

  

Explanation for incorrect options:

a.

Since at Q2 output level MR equal to MC. Therefore, option a is incorrect.

c.

The prices are selected on the basis of demand curve where MR =MC condition is met. Therefore, option c is also incorrect.

.

d.

At Q5 MR curve does not intersect with MC curve but MC =ATC. This condition does not ensure the maximum profit. Therefore, option d is incorrect.

e.

At Q4 also MC curve does not intersect with MR curve to fulfill the profit maximization condition under monopolistic competitive market. Therefore, option e is incorrect

Economics Concept Introduction

Monopolistic market structure: Market structure where there are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.