Final answer:
To prevent a long-run shutdown, an entity must generate enough revenue to cover all operating costs, including fixed and variable costs. Short-run operation is possible if variable costs are covered, but long-run viability requires covering full costs to avoid exit.
Step-by-step explanation:
To avoid shutting down in the long run, an entity must cover all its operating costs, which include both variable and fixed costs. In the short run, a firm might continue to operate as long as it can cover its variable costs, because it has already incurred fixed costs (such as rent, utilities, and salaries) that must be paid regardless of whether it is producing any output. However, in the long run, to prevent shutdown and exit from the market, the firm must generate revenues that are sufficient to cover the entire cost structure, including both fixed and variable costs. Failure to achieve this can lead the firm to cease production altogether; this long-run process is referred to as an 'exit'. For a firm facing sustained losses, the decision to keep producing or to shut down is critical, as continuing to produce can sometimes lead to even greater losses.