A firm realizes that the market price has fallen below its average total costs,and it is now earning a loss.What is the best action for the firm to take in the short run?

Question

Quizplus · Accepted Answer

In the short run, a firm should stay open if the price is greater than the average variable costs (AVC). This is because even though the firm is making a loss, it is still contributing to covering its variable costs. By shutting down, the firm would be unable to recover any of its costs and would be incurring a greater loss. However, if the price falls below the AVC, the firm should shut down since it would be incurring a loss that is greater than all of its variable costs.

A Firm Realizes That the Market Price Has Fallen Below