A monopolistically competitive firm is operating in the short run at the optimal level of output and is earning negative economic profits. Which of the following must be TRUE?
A) ATC P MR = MC.
B) ATC = P MR = MC.
C) ATC P = MR = MC.
D) ATC P MR MC.

Question

A monopolistically competitive firm is operating in the short run at the optimal level of output and is earning negative economic profits. Which of the following must be TRUE?
A) ATC > P > MR = MC.
B) ATC = P > MR = MC.
C) ATC > P = MR = MC.
D) ATC > P > MR > MC.

Quizplus · Accepted Answer

In the short run, a monopolistically competitive firm earning negative economic profits means that the average total cost (ATC) is greater than the price (P). At the optimal level of output, the firm sets marginal cost (MC) equal to marginal revenue (MR), so ATC > P > MR = MC.

A Monopolistically Competitive Firm Is Operating in the Short Run