Answer to Question #131554 in Microeconomics for murendeni

Question

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

Answer 1

answer

When market prices are greater than the firm's average variable cost, firms are able to meet the costs associated with production; such as cost of raw materials, labour and operations; and stay profitable in the short run. This is because fixed costs such as the cost of acquiring machinery and buildings, do not influence short run decisions of a firm. These costs are relevant in the long run. A company should only shut down if revenue from it's production cannot meet the negative cash flows incurred in the process of production