Question

Toby operates a small deli downtown. The deli industry is monopolistically competitive. Toby is producing the quantity that minimizes his average total cost. Assuming that Toby is maximizing profits, his:
a. marginal cost is less than his marginal revenue.
b. price equals his average total cost.
c. price is more than his average total cost.
d. marginal cost is less than his average total cost.

Answer 1

If we are to assume that Toby is maximizing his profit, then his a. marginal cost is less than his marginal revenue.

How can profit be maximized?

The profit to a monopolistically competitive firm is the point where marginal revenue is equal to marginal cost. At this point, it means that the resources are all being utilized effectively.

However, it is also possible to minimize average total cost if the marginal revenue is more than the marginal cost. For this to happen, the average total cost needs to be minimized as is the case with Toby.

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