In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.

Question

Quizplus · Accepted Answer

This is because in the short run, a firm still has to pay its fixed costs regardless of whether or not it produces. By continuing to produce, the firm can at least cover some of its variable costs and contribute towards covering its fixed costs. However, in the long run, the firm should eventually shut down if it cannot cover its average total cost of production with its market price.

In the Short Run, a Firm Might Choose to Produce