Answer to Question #180677 in Microeconomics for Eva

Question

Why would a firm choose to operate at a loss in the short run?explain carefully

Answer 1

Solution:

A firm may choose to operate at a loss in the short run since it expects to earn a profit in the near future as the prices increase or the production costs fall. A firm normally has two choices in the short run. It can either produce some output or temporarily shut down production. Therefore, it will select the more profitable option. When the firm expects its product prices to increase or production costs to decrease, it will continue to operate at a loss in the short run.

 

If that’s not the case, a firm will, therefore, find it profitable to shut down temporarily when its product prices are less than the minimum average variable cost (AVC) since revenues from production will not cover variable costs and losses will continue to increase.