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Part III: Market Structures and the Decision-Making Environment
Relying on calculus in monopolistic competition Profit is always maximized at the quantity where marginal revenue equals marginal cost. To determine marginal revenue, you take the derivative of total revenue with respect to quantity. To determine marginal cost, you take the derivative of total cost with respect to quantity. Assume your monopolistically competitive firm’s demand curve is
where P is the good’s price in dollars and q is the quantity produced by the monopolistically competitive firm. Also assume your total cost equation is
where TC is total cost in dollars and q is the quantity of the good produced. Given these equations, the profit-maximizing quantity of output, price, and profit are determined through the following steps:
1. Determine total revenue.
Total revenue equals price multiplied by quantity.
2. Determine marginal revenue.
Marginal revenue is the derivative of total revenue taken with respect to quantity.
3. Determine marginal cost by taking the derivative of total cost with respect to quantity.
