Question

How can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or experience losses?

Short answer

To determine whether a monopolistic competitor will earn profits or experience losses, the firm should compare the price they are charging with their average total cost (ATC). If the price is greater than the ATC, the firm will earn profits, and if the price is less than ATC, the firm will experience losses. This can be calculated using the formula: Profit or Loss per unit = Price - ATC. By comparing the price and ATC, the firm can understand their financial situation given the current market and production conditions.

Step-by-step solution

Determine the Price and Average Total Cost (ATC)

First, the monopolistic competitor needs to determine the price they are charging for their product and find the average total cost (ATC) of producing that product.

Compare the Price with the ATC

Next, the firm needs to compare the price they are charging with the ATC. If the price is greater than the ATC, the firm will earn profits because the revenue they receive from selling each unit of the product is greater than the cost of producing it. If the price is less than the ATC, the firm will experience losses because the revenue they receive from selling each unit is less than the cost of producing it. To calculate profit or loss per unit, we can use the following formula: Profit or Loss per unit = Price - ATC

Determine if the Firm Will Earn Profits or Experience Losses

Based on the comparison of the price and ATC, we can determine if the firm will earn profits or experience losses. - If the Price > ATC, then the firm will earn profits because they earn more revenue than the cost of producing the product. - If the Price < ATC, then the firm will experience losses because they do not earn enough revenue to cover their production costs. By comparing the price charged by a monopolistic competitor with its average total cost, the firm can determine whether they will make profits or experience losses given the current market and production conditions.