Final answer:
A monopolistic competitor determines economic loss by comparing the price to the marginal revenue and marginal cost. Short-term losses may be tolerated as long as variable costs are covered, but sustained losses lead to an industry exit in the long run.
Step-by-step explanation:
To determine whether a monopolistic competitor is experiencing economic loss, it must assess whether the price it charges covers all its costs. If the company finds that the price equals both the marginal revenue (MR) and marginal cost (MC) yet still results in a loss, then it's not covering all of its costs, including fixed costs, leading to an economic loss. In the short run, the firm can continue to operate as long as the price covers the variable costs and contributes something toward fixed costs. However, if it's not even covering the variable costs, it may opt to shut down and incur only its fixed costs instead of continuing to produce.
Moreover, in the long run, if a firm continuously experiences losses, it may exit the industry altogether. This decision comes after a period of assessing if its revenues can cover not just variable but also fixed costs over time. The long-term decision to cease production is referred to as an 'exit.'