Sometimes a firm will continue to operate even if that firm incurs short-run negative profits (losses). Which of the following characterizes this situation? A) $P = M C = A C$. B) $P = M C = A V C$. C) $P = M C$ where $P A V C$ but $P A C$ but $P

Question

Sometimes a firm will continue to operate even if that firm incurs short-run negative profits (losses). Which of the following characterizes this situation? A) $P = M C = A C$. B) $P = M C = A V C$. C) $P = M C$ where $P > A V C$ but $P < A C$. D) $P = M C$ where $P > A C$ but $P < A V C$.

Quizplus · Accepted Answer

This situation is referred to as operating at a loss, where the price ($P$) equals the marginal cost ($M C$) but is less than the average cost ($A C$), while still exceeding the average variable cost ($A V C$). This implies that the firm is covering its variable costs but not its fixed costs, resulting in short-run negative profits or losses. Despite this, the firm may choose to continue operating in the short-run, as long as it expects to recover the fixed costs and earn a profit in the long-run. Choice A is incorrect because it implies that the firm is making zero economic profit, which may not be the case if it incurs losses. Choice B is incorrect because it implies that the firm is covering both its variable and fixed costs, which may not be true if it is experiencing losses. Choice D is incorrect because it implies that the firm is not covering its average variable costs, which would result in immediate shutdown in the short-run. In the short run, a firm may continue to operate even if it incurs losses as long as the price it receives for its output is greater than its average variable cost (AVC). This is because the firm can still cover its variable costs and contribute something toward its fixed costs. Thus, the firm can minimize its losses by continuing to operate at a point where price equals marginal cost (P=MC), but where price is less than average total cost (ATC). Therefore, the firm can continue to operate in the short run as long as it is able to cover its variable costs (VC) while earning revenue, as in choice C.

Sometimes a Firm Will Continue to Operate Even If That P=MC=ACP = M C = A CP=MC=AC

Sometimes a Firm Will Continue to Operate Even If That $P = M C = A C$