Answer to Question #235805 in Microeconomics for Mozahidul Islam

Question

Illustrate short run profit maximization scenerio of a competitive firm in case of loss.

Answer 1

A monopolistically competitive company maximises profit or avoids losses in the near run by producing the quantity where marginal revenue equals marginal cost. If the average total cost is less than the market price, the company will make a profit.

 

If the average total cost is higher than the market price, the business will lose money, which is equal to the average total cost minus the market price multiplied by the amount produced. Losses will still be minimised by producing the amount where marginal revenue equals marginal cost, but the business will ultimately have to either reverse the losses or quit the industry.

 

Short-Run Loss = (ATC - Price) × Quantity

• D = Market Demand
• ATC = Average Total Cost
• MR = Marginal Revenue
• MC = Marginal Cost