Final answer:
A monopolistically competitive firm determines its profit-maximizing price by equating marginal cost and marginal revenue and can charge a higher price than in perfect competition. Profits are possible in the short run due to some degree of market power, but these profits may diminish in the long run due to potential market entry and competition.
Step-by-step explanation:
In a monopolistically competitive market, a firm seeking to maximize profits may not charge the same price as a firm in a perfectly competitive market. In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits is determined by the point at which its marginal cost is equal to its marginal revenue, which will not necessarily be at the market price, as it would be for a perfectly competitive firm.
The process for a monopolistically competitive firm to decide on the profit-maximizing price involves first determining the quantity of output where marginal cost equals marginal revenue. Unlike in perfect competition, where the firm is a price taker, a monopolistically competitive firm has some degree of market power which allows it to charge a price above its average cost, thus earning a profit in the short run.
However, the presence of other firms selling similar, but not identical, products and the potential for new entrants in the long run can erode these profits. Hence, while a monopoly is secured by entry barriers and can earn profits consistently, a monopolistic competitor can enjoy profits only in the short run and must continue to differentiate their product and manage costs effectively.