Final answer:
The average unit cost will be higher when production is below the optimal rate of output due to the distribution of fixed costs over fewer units and the lack of full exploitation of economies of scale. Firms will aim to minimize losses by producing the quantity of output where total revenues are closest to total costs when they are operating at a loss.
Step-by-step explanation:
When the output is less than the optimal rate of output, the average unit cost will be higher. This is because there are certain fixed costs associated with production that do not change with the quantity of goods produced; when fewer units are produced, these fixed costs are spread out across fewer units, raising the average cost. Additionally, operating below the optimal level may also mean that the economies of scale are not being fully exploited, leading to inefficiencies and higher costs per unit.
If a firm finds that the price of their goods has dropped low enough that total revenue is less than total costs at all levels of output, the firm will operate at a loss. The firm must then decide whether to continue producing and minimize losses or to shut down temporarily. The preferable option is the one that loses the least amount of money, which is usually the output level where total revenues come closest to total costs minimizing the loss.