Dealing with Losses Shutdown rule MR=MC, Q*; in the short run: In the short run, the firm should continue to produce if total revenue exceeds total variable costs; otherwise, it should shut down MR=MC, Q*; in the short run: If TR>TVC - keep producing If TR < TVC - shut down If TR = TVC - indifferent between shutting down and producing

Dealing with Losses Figure 4 Loss Minimization (a) TC Dollars Output Loss at Q* TR>TVC Loss <TFC TVC TFC Q* TR TFC

Dealing with Losses Figure 4 Loss Minimization (b) Dollars Output MC Q* MR

Dealing with Losses Figure 5 Shut Down TC Dollars Output Loss at Q* , TVC>TR Shut down, produce nothing, Loss=TFC in the short run TVC TFC Q* TR TFC

The Long Run: The Exit Decision A permanent cessation of production when a firm leaves an industry A firm should exit the industry in the long run when - at its best possible output level - it has any loss at all

Getting It Right The Success of Continental Airlines Mid 1960s - Other airlines Offered a flight if 65% of seats sold Used average cost to make decisions Continental Airlines Flying jets filled to just 50% capacity Expanded flights on many routes Increase profits Used marginal cost approach to make decisions