If a firm is operating at a loss in the short run and finds that its price is greater than average variable cost, then

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Quizplus · Accepted Answer

If the price is greater than average variable cost, then the firm is still earning enough revenue to cover its variable expenses. By producing where MR = MC, the firm will be minimizing its losses, as it will be producing at the output level where the additional revenue earned from producing one more unit (MR) is equal to the additional cost incurred from producing one more unit (MC). Producing zero output would not make sense as the firm would still incur its fixed costs and earn no revenue. Total revenue is not relevant to this decision, but total variable costs are important as they determine whether the firm is able to cover its variable expenses with the revenue earned from producing.

If a Firm Is Operating at a Loss in the Short