By continuing to operate when price is greater than average variable cost but less than average total cost,a firm limits its losses to:

Question

Quizplus · Accepted Answer

When a firm operates in the short run, it should continue producing as long as price is greater than average variable cost. This is because at this level of output, the firm is covering all of its variable costs and some of its fixed costs. If the firm shuts down, it would only avoid its variable costs, but it would still have to pay its fixed costs. Therefore, the firm should continue operating as long as price is greater than average variable cost but less than average total cost.

If the firm operates in this range, it will make some revenue that is sufficient to cover its variable costs, and some of its fixed costs. Therefore, it limits its losses to the difference between its total fixed costs and the amount by which total revenue exceeds total variable costs. This is because the fixed costs are sunk costs that the firm cannot recover, and so they must be borne by the firm whether it operates or shuts down. Thus, the best choice is C.

By Continuing to Operate When Price Is Greater Than Average