Answer to Question #101621 in Economics for Tola

Question

Suppose a monopolistic firm is making loss in the short run, can the firm continue to stay in business? Explain in no more than two sentences

Answer 1

In the short run monopolistic firm strives to maximize profit or minimize losses. If average total cost is above the market price, then the firm will incur losses, equal to the average total cost minus market price multiplied by the quantity produced. It will still minimize losses by producing that quantity where marginal revenue equals marginal cost, but eventually the firm will either have to reverse the losses or it won't be able to stay in business.