Question

Why will a perfectly competitive firm choose to operate when the market price is below the minimum of average total cost (ATC), but above the minimum of average variable cost (AVC)?

Answer 1

A firm in a perfectly competitive market would be willing to operate when the price is below the ATC but above the AVC because in the short run the fixed cost are considered as sunk cost and its the variable costs which only matters as the firm is producing the output by making the payments to its variable factos.

The firm has already paid for their fixed cost and if the firm produces zero quantity and shuts down,it will still incur a loss equal to its fixed cost but if it is able to recover its variable cost then it will continue to produce as it is operating above its shutdown point which is given by when P<its minimum AVC.As long as it is able to recover its variable cost,it will minimize its loss by continue to produce in the short run.