If a firm operates at a loss, the loss is equal to TC – TR. If the fir

If a firm operates at a loss, the loss is equal to TC – TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down.

What will be an ideal response?

ANSWER

The firm operates at a loss if TC – TR < FC. Adding TR - FC to both sides yields VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as AVC < p.