Final answer:
A monopolistically competitive firm determines its profit-maximizing price by selecting the output quantity where MR equals MC and then charging the corresponding price on the demand curve for that quantity.
Step-by-step explanation:
In the long run, a profit-maximizing monopolistically competitive firm sets its price by first determining the quantity of output where marginal revenue (MR) is equal to marginal cost (MC). Then it charges the price that customers are willing to pay for that quantity of output according to the demand curve. In contrast to a perfectly competitive firm, which charges a constant market price, a monopolistically competitive firm has some power to set prices because its products are differentiated.
A monopolistically competitive firm identifies its profit-maximizing quantity of output by setting MR = MC. It then uses the perceived demand curve to decide the price to charge for that output level, ensuring the maximum difference between total revenue and total cost, and hence maximizing profits. The price set will typically be above the average cost of production, allowing the firm to achieve a profit if cost conditions are favorable.