When a profit-maximizing competitive firm decides to produce at a loss because its price is below average cost but above average variable cost, that is a long-run decision.

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This is typically a short-run decision because in the long run, a firm will not continue to operate if it cannot cover all of its costs, including both variable and fixed costs. In the short run, covering variable costs and some fixed costs can be sufficient to keep operating.

When a Profit-Maximizing Competitive Firm Decides to Produce at a Loss