Companies continue producing in the short run even if it is making a loss, providing it...

Companies continue producing in the short run even if it is making a loss, providing it can cover its variable costs. Explain why. Just how long will it be willing to continue making such a loss?

Expert Solution

In short run , companies continue producing even if it is making a loss providing it can cover its variable cost. Companies continue to stay in business to cope with losses so as long as price is equal to or greater than average variable costs because in this situation companies can cover its variable costs . If a price that firm charges higher than its average variable cost of production , then firm would earn profits. If price charged by a firm is lower than average variable cost of production , the firm will suffer losses. But even though firm make losses, it will stay on business and continue its production If price falls below average variable costs , the companies will be shutting down the production in short run. By producing any output and it does not generate enough revenue to cover the variable cost and cover fixed cost only, then firm will stop their production process. Because when price is less than average variable cost, firm still incurring fixed cost. So the company's profit equals the negative of fixed costs. If the firm is receiving a price below the price at shut down point ( P> or = AVC) , then firm would stuck with all its fixed cost and have no revenue . If it shut down then its loss will equal to its fixed cost

Rahul Sunny answered 1 year ago

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