Question

Decide whether a firm making short-run losses should continue to operate or shut down its operations. Try these problems: 1, 17

Short answer

The business is selling the product for less than it costs to produce (not even counting the fixed costs such as initial costs of building the facility etc.). As a result, the company should shut down if it can't even pay its variable costs.

Step-by-step solution

Introduction

In the short run, if a business cannot recoup its fixed expenses, it will decide to temporarily close down if the product's value is less than the average variable price. When a business can retrieve fixed and variable costs, it will decide to quit if the cost is less than the average total price in a lengthy period.

Short run losses and shut down

In the short run:The firm should shut down if the price is below average variable cost. If the price is above average variable cost but below average cost, the firm should continue to operate although it is making a loss.In the near run, a decision to not create something because ofthe market situation (closed down if P<AVC), yet the corporation should still pay FC.

Exit:A long-term choice to exit the market. There are no expenses. If P <ATC, leave.The fixed costs should be paid even if the SR is shut off.If they exist in LR, they will pay no fees.