Explain why a firm should continue to operate in the short run so long

Explain why a firm should continue to operate in the short run so long as market price is greater the the firm’s average variable cost at the profit-maximizing level of output.

What will be an ideal response?

ANSWER

So long as market price is greater than average variable cost at the profit-maximizing level of output, the firm’s total revenues will be greater than its total variable costs. Thus, the firm will be able to pay all of its variable costs and have some amount of money left over to pay part of its fixed costs. If the firm decided to shut down it would have to pay all of its fixed costs out of pocket. This amount is clearly greater than the loss it incurs if it continues to operate.