Question

Profit Maximization: firms make the most profit by setting their output (or price if they have market power) where marginal cost (mc) equals marginal revenue (mr). Again, explain why profits are largest when mc=mr and describe how that works in monopolistic competition when the firm can choose the point on market demand where it wishes to operate. Explain why the firm does not produce where marginal cost crosses demand (that is where a competitive firm would be located) but rather further up demand onto the elastic segment of the demand curve. Note again that the ability of a firm to raise price above the competitive price is termed "Market Power."

Answer 1

Profit is maximised when marginal revenue=marginal cost.

Marginal profit=marginal Revenue-marginal cost

marginal profit is the additional profit or an increase in profit due to an additional unit sold.

In case of monopolistic competition, firm produces at a point where marginal cost=marginal revenue but because of free entry and exit, all firms in monopolistic competition earn only 0 economic profit. Thus price is also be equal to average total cost.

Firm doesn’t produce at a point where marginal cost=demand curve because the willingness to pay for the last quantity sold will be equal marginal Cost but when price is reduced then it gets reduced for all the previous quantity sold.

We know  firm produces at a point where marginal revenue=marginal cost and when marginal revenue is positive then firm is on upper half of the demand curve. Thus on the upper half of the demand curve, demand is elastic.

Yes when firm charges  price above the perfectly competitive price then it means firm have market power.