Competitive firms that earn a loss in the short run should

Question

Quizplus · Accepted Answer

If a competitive firm is earning a loss in the short run, it should shut down if the price (P) is less than the average variable cost (AVC). This is because continuing to produce at a loss will only deepen the losses. By shutting down, the firm would avoid incurring variable costs and be able to minimize their losses. Raising prices or lowering output would not be effective in this scenario as the market is competitive, and the firm has no control over prices.

Competitive Firms That Earn a Loss in the Short Run