Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Negative Economic Profit
B
Positive Economic Profit
C
Zero Economic Profit
D
Uncertain Economic Profit
Understanding the Answer
Let's break down why this is correct
Answer
When a firm in monopolistic competition sets its price below its average total cost, it means the firm is not covering all its expenses. This situation indicates that the firm is operating at a loss because it is spending more on production than it is earning from sales. For example, if a company sells a product for $10 but its total cost to produce that product is $12, it is losing $2 on each sale. Therefore, we can classify the firm's economic profit situation as negative, meaning it is experiencing an economic loss. This loss can lead to the firm reconsidering its pricing strategy or even exiting the market if the situation does not improve.
Detailed Explanation
When a firm sells at a price lower than its average total cost, it loses money. Other options are incorrect because Some might think that selling at a low price means making money; Zero economic profit means the firm covers all costs but makes no extra money.
Key Concepts
Economic Profit Evaluation
Monopolistic Competition
Pricing Strategies
Topic
Economic Profit Evaluation
Difficulty
easy level question
Cognitive Level
understand
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