Price Of Product Being Equal To Marginal Cost
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Question
Your friend Mike owns a coffee shop in a town with many competing coffee shops in a monopolistically competitive industry. One day Mike tells you (a trained economist) that he is earning an economic profit and is currently setting his price equal to his marginal cost. Is Mike producing the profit-maximizing amount of coffee? If not, what should he do? Explain. What will be effect of that proposed course of action?
Summary
The question belongs to Economics and it discusses about price of a product or service being equal to the marginal cost and whether or not this pricing is indeed producing profit to the firm. The details have been given in the solution.
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