In the long run, if price is below average total cost (ATC) the firm will: A) shut down. B) keep running. C) produce more. D) cover its variable costs. Answer is A. However, in the short run, if the price is below ATC, the firm will continue to operate as long as it can cover its Variable Costs. Can someone explain why this is not possible in the long run?
I guess in the long run if price continues to be below ATC the firm will go bust. in the short run the firm can continue to operate as you pointed out
A - 100% Why continually operate at a loss? #1 Goal make money for CE. You can’t acheive this.
“long run” is the operating word… its amazing how I missed that part and was quick to choose D (before I saw the answer).
In the LR they can change their fixed costs by adjusting labor, plant usage etc. Can’t do this quickly in the SR. If they still can’t cover their ATC in the LR after adjusting the above the business sucks and will shut down. The idea is that they’re willing to take the temporary losses since the know they can eventually adjust the fixed costs to become profitable again. If they can’t do that, there’s no need to stay in business.
Answer is A. However, in the short run, if the price is below ATC, the firm will continue to operate as long as it can cover its Variable Costs. In the short run they will continue operating as long as they can cover their fixed costs.