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When perfectly competitive firms and monopolistic firms are incurring losses in the short run, their reactions...

When perfectly competitive firms and monopolistic firms are incurring losses in the short run, their reactions may differ. Explain what each firm would do.

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Answer #1

In perfect competition firms are price taker they can not set price and if they increase the price to earn profit no one will buy from them because there is perfect information in perfect competition so the firm will operate only when price is greater than average variable cost (it can cover its average variable cost )else it would be better of if it do not produce any thing and exit market because than it will incur loss which is equal to fixed cost only and if average variable cost is greater than price than it will incur greater loss than a condition when it do not produce anything and exit market .

The monopolist will try to minimize its loss be selling the quantity at which the marginal revenue is equal to marginal cost and will try to compensate loss by earning profit or it will have to exit market

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