Question

for a monopolistic competitor experiencing a short - run loss, price is ____ average total cost and ____ marginal cost.
a. less than; less than
b. equal to; less than
c. greater than; greater than
d. less than; greater than

Explanation:

1. Short - run loss for monopolistic competitor: A firm incurs a loss when total revenue (TR) is less than total cost (TC). Total revenue is price (P) times quantity (Q), \(TR = P\times Q\), and total cost is average total cost (ATC) times quantity, \(TC=ATC\times Q\). So, if \(TR < TC\), then \(P\times Q0\) (quantity produced is positive), we can divide both sides by \(Q\) and get \(P < ATC\).
2. Profit - maximizing rule for monopolistic competitor: Like all firms, a monopolistic competitor maximizes profit (or minimizes loss) where marginal revenue (MR) equals marginal cost (MC), \(MR = MC\). In monopolistic competition, the demand curve (which is also the price curve since \(P = AR\)) is downward - sloping, and \(MR\) lies below the demand curve. So, \(P>MR\). But since at the profit - maximizing (loss - minimizing) quantity, \(MR = MC\), we have \(P>MC\).

So, for a monopolistic competitor with a short - run loss, price is less than average total cost (\(P < ATC\)) and greater than marginal cost (\(P>MC\)).

Answer:

D. less than; greater than