A monopolistically competitive firm faces the following dema

A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. Price Quantity $30 1 $26 2 $22 3 $18 4 $14 5 $10 6 $6 7

Refer to Table 16-7. If the firm has a constant marginal cost of $7 per unit, what price should the firm charge to maximize profit?

A. $18

B. $22

C. $14

D. $10

Solution

Working note:

Total revenue (TR) = P x Q

Marginal revenue (MR) = Change in TR / Change in Q

A monopolistic competitor maximizes profits by equating MR with MC.

So, equilibrium is at Q = 4 where MR = $6 (closest to MC of $7), with price = $18

Correct option (A).