Question

The Optimal Output Rule states a monopolistic competition producer should produce to the point where:

a. MR = AVC

b. MR < MC

c. MR > MC

d. MR = MC

Answer 1

d. MR = MC

Explanation :

Monopolist maximise its profit by producing where MR equals MC and it is optimal production.

Marginal revenue is the extra revenue generated by the firm with selling one more extra unit and marginal cost is the extra cost occurred with the production of one more extra unit.

So when extra revenue is greater than extra cost, the extra unit of production is profitable. When extra revenue is less than extra cost, production of one more extra unit is not profitable. So firm maximizes its profit where MR equals MC.