Question

Explain: “The short-run rule for operating or shutting down is P > AVC, operate; P < AVC shut down.  The long-run rule for continuing in business or exiting the industry is P ≥ ATC, continue; P < ATC, exit.”

Answer 1

if a firm can cover its variable costs and a part of its fixed costs in the short run, the firm operates. If The firm is not able to cover its variable cost it shuts down.

In the short run, a firm has to incur fixed costs irrespective of the fact that it operates or not. If a firm can cover its variable costs and a portion of its fixed costs (P > AVC) the lose it incurs by operating is less than by shutting down. In the long run All costs are variable and there is no fixed costs; all costs If a firm is not able to cover all of its costs meaning P< ATC then to exit the market is better.

answered by: anonymous