CIMA BA1 · Chapter 7 · Question 7 of 11
In the short run, a perfectly competitive firm making a loss should continue to produce as long as:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Price covers average variable cost
Explanation
Fixed costs must be paid whether or not the firm produces. If price covers average variable cost, producing makes a contribution towards fixed costs and reduces the loss. If price falls below AVC, the firm should shut down in the short run.
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