If a firm operates at a loss, the loss is equal to TC - TR. If the firm shuts down instead, its loss is equal to FC. Given this, show that price must exceed AVC for the firm to operate at a loss and not shut down
What will be an ideal response?
The firm operates at a loss if TC - TR < FC. Adding TR - FC to both sides yields
VC < TR. Dividing by q yields AVC < p. That is, the firm will operate at a loss as long as
AVC < p.
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