Question

Even if it is making economic losses, a perfectly competitive firm should keep operating in the short run so long as the price is:__________

Answer 1

Even if it is making economic losses, a perfectly competitive firm should keep operating in short run so long as price is higher than average variable cost. A company operating in  perfect competition has no control over product's price. A company that stops producing, or closes down temporarily, will incur losses proportional to the fixed costs.

Because the firm's losses will be smaller in that scenario than the fixed costs, it will be prudent to continue functioning in near term when firm's total income surpasses firm's entire fixed expenses. Losses result when the market's price drops below average overall cost.

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