Final answer:
When a competitive firm or monopolist's price is less than the average total cost, the firm is incurring losses. This situation arises when the price is not enough to cover the costs of production. Maximum profits occur when marginal revenue equals marginal cost. The correct option is 2) The firm is incurring losses
Step-by-step explanation:
If a competitive firm or a monopolist is producing a level of output such that Price (P) < Average Total Cost (ATC), it can be concluded that the firm is incurring losses. This is because the price the firm receives for its product is not sufficient to cover the average costs of production at that level of output. When a firm's price is greater than ATC, it earns an economic profit, while a price equal to ATC implies that the firm is operating at the break-even point, earning zero economic profit.
For a perfectly competitive firm, as the quantity of output increases, its total revenue also increases at a constant rate determined by the prevailing market price. In such firms, profits are maximized when marginal revenue, equal to the market price, is equivalent to marginal cost. Thus, if the market price is below ATC at the profit-maximizing quantity of output, the firm will experience losses. The correct option is 2) The firm is incurring losses