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If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit

is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of

output until MR = MC.

In this example, MR and MC intersect at a quantity of 40, which is the profit-maximizing level of output for the

firm.

Step 2. The monopolistic competitor decides what price to charge. When the firm has determined its profit-

maximizing quantity of output, it can then look to its perceived demand curve to find out what it can charge for

that quantity of output. On the graph, we show this process as a vertical line reaching up through the profit-

maximizing quantity until it hits the firm’s perceived demand curve. For Authentic Chinese Pizza, it should charge

a price of $16 per pizza for a quantity of 40.

Once the firm has chosen price and quantity, it’s in a position to calculate total revenue, total cost, and profit. At a
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