If a firm produces where marginal revenue is equal to marginal cost and price is less than average variable cost then the firm should not produce at all - even in the short run.

Question

Quizplus · Accepted Answer

If price is less than average variable cost, then the firm is not covering its variable costs and is operating at a loss. In the short run, the firm may choose to continue operating at a loss if it can recover some of its fixed costs. However, if the firm produces where marginal revenue is equal to marginal cost, it is already producing at the efficient level and cannot reduce its costs any further. Continuing to produce will only result in further losses, so it is better for the firm to not produce at all in this situation.

If a Firm Produces Where Marginal Revenue Is Equal to Marginal