Final answer:
In a monopolistically competitive market, the profit-maximizing rule is MR = MC, leading to a situation where the price charged is higher than the marginal revenue. This deters production of additional units that could benefit society, differing from perfect competition where MR equals price.
Step-by-step explanation:
In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC (marginal revenue equals marginal cost). This results in a situation where price is higher than marginal revenue. This contrasts with a perfectly competitive market where price equals marginal revenue (MR = P). In monopolistic competition, demand is downward sloping, causing a discrepancy between price and marginal revenue because additional units sold can affect the market price.
A monopolistically competitive firm will choose the output level where MR = MC, and then charge the highest price that consumers are willing to pay for that output level as indicated by the demand curve. If this price exceeds average cost, the firm will earn positive profits. This outcome leads to a loss of potential social welfare because there are units that could have been produced where the price (indicating the benefit to society) is greater than the marginal cost (indicating the cost to society), but are not due to the firm's pricing strategy.