When the Price (marginal revenue) is less that Average Total Cost, but more than Average Variable Cost

When the Price (marginal revenue) is less that Average Total Cost, but more than Average Variable Cost, the firm is making ___________ (positive profit/negative profit) and should __________ (shut down/stay in business).

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Expert Solution

Ans. Negative profit; stay in business

When price is greater than average variable cost but less than average total cost, the firm incurs loss. The firm is able to cover its variable cost which is its operating cost and is not able to cover the fixed cost which it has to incur in the short run. But since the firm is able to cover the operating costs of production, it is beneficial for the firms to keep on producing and to stay in the business since even if they shut down the business they will have to incur the fixed costs. This way it is better for the firms to stay in the business and keep producing and incurring negative profits.

Rahul Sunny answered 1 year ago

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