If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.

Question

If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.
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Quizplus · Accepted Answer

In the short run, if the price covers the average variable cost, the firm can cover its variable costs and contribute to covering its fixed costs, even if it's not making a profit. This is preferable to shutting down immediately, where it would still incur fixed costs without generating any revenue.

If a Firm Observes That the Price of Its Product