Answer to Question #76058 in Macroeconomics for Kxngolt

Question

Allowing firms to charge a price above the marginal cost is important to promote innovations in the economy. Explain.

Answer 1

Answer on Allowing firms to charge a price above the marginal cost is important to promote innovations in the economy

Allowing firms to charge a price above the marginal cost is optimal only for monopolistically competitive firms, but this will also create dead-weight loss and inefficiency, because in competitive markets P = MC = MR.