A company conducting business in a monopolistically competitive market will most likely maximise profits when its output quantity is set such that ______.Average cost is minimised.Marginal revenue equals average cost.Marginal revenue equals marginal cost.
Question
A company conducting business in a monopolistically competitive market will most likely maximise profits when its output quantity is set such that ______.Average cost is minimised.Marginal revenue equals average cost.Marginal revenue equals marginal cost.
Solution
A company conducting business in a monopolistically competitive market will most likely maximise profits when its output quantity is set such that marginal revenue equals marginal cost.
Here's why:
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Marginal Revenue (MR): This is the revenue that a company gains from selling an additional unit of product. It can increase or decrease depending on the level of production.
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Marginal Cost (MC): This is the cost of producing an additional unit of product. Like MR, it can also increase or decrease depending on the level of production.
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In a monopolistically competitive market, a company maximises its profit by producing up to the point where MR equals MC. This is because at this point, the cost of producing an additional unit of product (MC) is exactly equal to the revenue gained from selling that additional unit (MR).
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If a company produces beyond this point (i.e., where MR is less than MC), it would be making a loss on each additional unit of product because the cost of producing an additional unit (MC) would be more than the revenue gained from selling that additional unit (MR).
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On the other hand, if a company produces less than this point (i.e., where MR is more than MC), it would be missing out on potential profits because the revenue from selling an additional unit (MR) would be more than the cost of producing that additional unit (MC).
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Therefore, to maximise profits, a company in a monopolistically competitive market should produce up to the point where MR equals MC.
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