Final answer:
It is true that as a firm approaches its break-even point, the degree of operating leverage decreases. Companies should keep operating if they can cover their average variable costs and minimize losses, and they generally aim to produce at the bottom of the long-run average cost curve to maintain efficiency and competitiveness.
Step-by-step explanation:
The statement that the closer a firm is to its break-even point, the lower the degree of operating leverage it will be is true. Operating leverage is a measure of how revenue growth translates into growth in operating income. A high degree of operating leverage indicates that a small change in sales can lead to a larger change in operating income. As a firm approaches its break-even point, the need for leverage diminishes because most of the income will go towards covering fixed and variable costs rather than generating profit.
Regarding the decision to continue to produce or shutdown when a firm is operating below the break-even point, the preferable option is the one that minimizes losses. The firm should continue operations as long as the price exceeds average variable costs, and it covers at least some portion of the fixed costs, thereby losing less money than it would if it were to shut down completely and still have to bear the full fixed costs without any revenue.
Firms tend to be located at or close to the bottom of the long-run average cost curve because this is the production level where firms are most efficient and competitive. Producing at the minimum point of the long-run average cost curve means that the firm is achieving the lowest possible cost per unit of output, which is crucial in competitive markets to survive and thrive.