Under what condition should a firm continue to produce in th

Under what condition should a firm continue to produce in the short run if it incurs losses at the best level of output Are the normal returns on investment included as part of costs or as part of profits in managerial economics Why

Solution

(a) If firm is making losses in short run, then it should operate as long as total revenue is more than total variable cost even if it cannot cover total costs.If variable cost is more than total revenue, then it should be shut down because firm is not even covering production costs.Also we can say, it will continue to operate in short run if P>AVC because price greater than AVC can cover fixed cost partially.

(b) Normal returns on investment will be included as a part of profit in mangerial economics.Return on investment is like performance of firm, so it can be treated as profit.