In a monopolistically competitive industry, price is:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Firms in monopolistic competition face downward-sloping demand curves and therefore set price above marginal cost.

1. Relevant knowledge points and concepts
- Monopolistic competition: many firms, product differentiation, each firm has some market power (a downward-sloping demand curve) so it is a price setter, not a price taker.
- Profit maximization: firms produce where marginal revenue (MR) = marginal cost (MC).
- For a downward-sloping demand, MR < price (P). Thus if MR = MC, it follows that P > MC (a markup over marginal cost).

2. Step-by-step reasoning
- Let demand be P = a − bQ (a typical linear demand). Total revenue TR = P·Q = aQ − bQ^2.
- Marginal revenue MR = d(TR)/dQ = a − 2bQ.
- The firm sets output where MR = MC. So a − 2bQ* = MC.
- The price charged is P* = a − bQ*.

3. Calculations / intermediate steps
- From MR = MC: a − 2bQ* = MC → rearrange to get Q* = (a − MC)/(2b).
- Substitute into price: P* = a − bQ* = a − b[(a − MC)/(2b)] = a − (a − MC)/2 = (a + MC)/2.
- Compute difference: P* − MC = (a + MC)/2 − MC = (a − MC)/2.
- Because demand must be positive for production (a > MC), (a − MC)/2 > 0, so P* > MC.

4. Why the correct answer is correct
- The algebra shows directly that with a downward-sloping demand the profit-maximizing price exceeds marginal cost. Economically, market power (product differentiation) allows firms to charge a markup over MC.

5. Why other options are incorrect
- b. Equal to marginal cost since each firm is a price taker — describes perfect competition, not monopolistic competition.
- c. Below marginal cost since each firm is a price setter — impossible for a profit-maximizing firm (selling below MC would reduce profit on each extra unit).
- d. Equal to marginal cost since each firm is a price setter — contradictory: price setters with downward-sloping demand generally set P > MC, not equal.

6. Conclusion
This reasoning confirms option a (“above marginal cost since each firm is a price setter”) is correct.

In a monopolistically competitive industry, price is:[Fill in the blank]Single choice

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