A monopolistically competitive firm is producing 50 units of output in the short run where marginal cost is $3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00, and marginal revenue is $3.00. How much profit is the firm

making? What output recommendation would you make for the firm?

What will be an ideal response?

The firm should not change the level of output because it is maximizing profits at the output level of 50 where the marginal cost of $3.00 is equal to the marginal revenue of $3.00. At that output, however, the firm is incurring $0.50 economic losses per unit ($4.50 price minus $5.00 average total cost) for a total economic loss of $25 ($0.50 times 50 units). The firm cannot operate under these conditions in the long run and will go bankrupt.