Suppose that price is below the minimum average total cost but above the minimum average variable cost. In the short run, a firm that is a price taker would:

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If the price is above the minimum average variable cost but below the minimum average total cost, the firm is making a loss. However, in the short run, the firm would continue to produce as long as the price is above the minimum average variable cost. This is because the firm can at least cover its variable costs in the short run, and shutting down would mean incurring additional losses. Therefore, the optimal strategy for the firm in the short run is to continue producing the quantity at which marginal cost equals marginal revenue, even though it is making a loss.

Suppose That Price Is Below the Minimum Average Total Cost