In the short run, a firm that is earning a loss should compare the market price to its _______ in order to determine how to minimize its losses.

Question

Quizplus · Accepted Answer

In the short run, a firm that is incurring losses should compare the market price to its average variable costs (AVC) to decide whether to continue producing or to shut down. If the market price covers the AVC, the firm should continue producing to minimize losses, as it can cover at least some of its variable costs and contribute to fixed costs. If the market price is below AVC, the firm should shut down in the short run, as it cannot cover its variable costs, and continuing production would increase losses.

In the Short Run, a Firm That Is Earning a Loss