Final answer:
A monopolistic competitor can determine if the price it is charging will lead to profits or losses by evaluating its pricing in relation to average and marginal costs, while considering the potential competitive actions of rivals in the market.
Step-by-step explanation:
The question relates to the strategic decisions firms make when competing against each other, particularly in the context of a monopolistic competitive market. It involves understanding the potential gains or losses a firm may experience through the process of competitive actions and reactions, such as attacking a rival or responding to an attack. The dynamics of competition can influence pricing, economic profits, customer shares, as well as long-run equilibrium in the market. Monopolistic competitors must decide prices by considering their cost structures, demand elasticity, and the potential reactions of their competitors. Specifically, a monopolistic competitor can tell whether the price it is charging will cause the firm to earn profits or experience losses by examining where the price falls in relation to the firm's average cost curve and its marginal cost curve. When a firm is earning positive economic profits, it may attract competing firms, leading to a decrease in demand and prices until profits are normalized in the long-run equilibrium.