When should a loss-making firm keep producing in the short run?
Produce where P=MC if price covers AVC; fixed cost does not alter the short-run shutdown rule.
Follow the cause and effect
Find q where P=MC on the rising portion.
Check P≥min AVC to choose production versus q=0.
Calculate profit as TR−VC−FC and distinguish long-run exit.
The model you are using
Conditions for this model
No additional startup costs; FC is paid even at q=0, and firm output does not affect price.
The exam trap
P<ATC means a loss, not immediate shutdown when P still exceeds AVC.
Connect the reasoning to the graph
What changes
- Firm supply is MC above min AVC, and profit is the rectangle (P−ATC)q.
What stays fixed
No additional startup costs; FC is paid even at q=0, and firm output does not affect price.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Calculate profit as TR−VC−FC and distinguish long-run exit.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Draw P between AVC and ATC, showing loss and the avoided variable-cost comparison.