Question

Draw a diagram illustrating the case of a firm in monopolistic competition losing money. Label the demand curve D, the marginal revenue curve MR, the marginal cost curve MC, and the average total cost curve ATC. Show the quantity the firm will chose to produce and the price it will charge and mark those Q1 and P1 respectively.

Answer 1

A monopolistic competitive firm will produce where MR and MC curves intersect each other.

So from the above graph, the monopolistic competitive firm will produce at Q1 units.

Price is on the demand curve at the intersection of MR and MC curves.

So the firm will sell at price P1 which is on the demand curve at Q1 units.

At Q1 units average total cost (ATC) is more than price P1 hence there the firm is having a loss.

The blue shaded region in the above graph represents the loss amount.