Final answer:
A firm minimizes its losses by producing where the price is above the average variable cost yet below the average total cost. This is the optimal production level in the short run as it allows the firm to cover its variable costs and some fixed costs, minimizing losses until conditions improve or the firm exits the market.
Step-by-step explanation:
The graph illustrates that a firm can minimize its losses by producing where the price exceeds minimum average variable cost but is less than average total cost. When a perfectly competitive firm's market price is above average variable cost yet below average total cost, it implies that the firm should continue producing in the short run, to cover its variable costs and contribute to fixed costs, thereby minimizing losses. However, if these conditions persist, the firm should plan to exit the market in the long run since it is unable to cover the total costs, hence not profitable in the long term.
In the scenario where the price equals average cost at the minimum point of the AC curve, the firm earns zero profits, known as the 'zero profit point.' Conversely, if the market price is below the average variable cost at the profit-maximizing quantity of output, the firm should immediately shut down operations to avoid further losses.