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# “Even if a firm is losing money, it may be better to stay in business in the short run.”

 ▲ 0 ▼ ♥ 0 “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? If so, under what condition(s)?
Answer and explanations Explanation
A firm has fixed costs and variable costs. Assuming that a firm has a fixed cost of \$1000, it has to pay the fixed cost irrespective of how much goods it produces. Let the average variable cost be dollar 10 and the price of the good be \$15. If the firm produces output at an optimal level of 100 units and marginal revenue is equal to marginal cost, then the total revenue that the firm produces is \$1500, and the total cost is \$2000 as variable cost is \$1000. So loss inquired by the firm is \$500 which is less than the loss the firm would have inquired if it did not produce at all. Therefore, it should keep on producing as long as the price is more than the average variable cost rather than shutting the business down.