Question

A monopolistically competitive firm is producing at an output level in the short run where average total cost is $4.75, price is $4.75, marginal revenue is $3.00, and marginal cost is $3.50. This firm is operating Multiple Choice with a loss. at the break-even point. with positive profits. at an optimal level of output.

Answer 1

Answer: With a loss

Explanation:

The firm here has its Marginal cost higher than it's marginal revenue.

This means that for every additional unit sold, the company is incurring a loss of $0.50 which is the difference between the marginal cost and the marginal revenue.

The company is therefore operating at a loss because every additional unit is costing them instead of benefitting them. To counter this, they need to reduce production so that marginal cost will fall.