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Firm selling at a price above its average variable cost

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    In the short run, if a firm is selling at a price higher than its average variable costs but lower than its average total costs, it should continue producing.

    Is this just out of hope that price rises again? As long as price stays at that level, it can't pay off their fixed costs anyway. So a firm only continues to produce to pay off as much of their fixed costs as they can but they will never fully pay it off?

    Have I got this right?
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    You are right in saying that a firm will survive as long as it is covering its variable costs. In the short run some costs are variable and some are fixed and as long as it covers the variable costs it will survive. In the long run all costs are variable so the firm has to cover all of its costs in the long run, otherwise it will go out of business.
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    (Original post by Sciurus)
    In the short run, if a firm is selling at a price higher than its average variable costs but lower than its average total costs, it should continue producing.

    Is this just out of hope that price rises again? As long as price stays at that level, it can't pay off their fixed costs anyway. So a firm only continues to produce to pay off as much of their fixed costs as they can but they will never fully pay it off?

    Have I got this right?
    You have the overall idea right but if you want the actual answer to this it is:

    A firm will have NOT reached it's shutdown point in the SHORT RUN as long as it continues to cover it's average variable costs (so AR > AVC), this is because it means they are still going to able to pay off at least some of their fixed costs, which regardless of the short run profitability, they still need to pay e.g. rent (like you still have to pay it for the month if you decide to shut down don't you?). However in the long run, the shut down point is reached when AR < ATC (so basically they aren't profitable) - there is no incentive for them to keep operating.

    So overall: Shut Down Point in Short Run --> AR < AVC (variable costs are not being covered, therefore no contribution to fixed costs)
    Shut Down Point in Short Run --> AR < ATC (no incentive to keep producing)

    Hope this helps!

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