Suppose that in the short run, a monopolistically competitive firm sells its product for $25 per unit. Its average total cost at this level of output is $30. This means that:

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In the short run, the firm is making a loss of $5 per unit as the price ($25) is less than the average total cost ($30). This means that the cost of producing each unit is higher than the price the firm is receiving. However, the firm may continue to operate in the short run if its total revenue covers its variable costs. In the long run, the firm will have to either improve its efficiency or raise its prices to cover its costs in order to make a profit.

Suppose That in the Short Run, a Monopolistically Competitive Firm