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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A monopolistically competitive firm will increase its production if

a. marginal revenue is greater than marginal cost.

b. marginal revenue is greater than average total cost.

c. price is greater than marginal cost.

d. price is greater than average total cost.

To determine
Monopolistic competition and production.

Explanation

Option (a):

When marginal revenue is greater than marginal cost, monopolistically competitive firms gear up their productionas each marginal unit brings in more profit by bringing in more revenue than its cost. The firms will add production up to a point where MR=MC. Thus, option ‘a’ is correct.

Option (b):

In monopolistic competition, downward sloping demand curve means marginal revenue is less than price; in the long run, just like in a competitive firm price equals to average total cost. Thus, in a monopolistically competitive firm, marginal revenue is less than average total cost. Therefore, option ‘b’ is incorrect...

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