Final answer:
A low break-even rate is more desirable as it means a business can recover its costs with a lower sales volume. The firm should aim to price above its average variable cost to stay operational and minimize losses. Operating above the break-even point is essential for avoiding losses.
Step-by-step explanation:
Having a low break-even rate is more desirable as it implies that a business can cover its operational costs with lower sales volume, minimizing risk and increasing the potential for profit. Figure 8.6 demonstrates that when the price exceeds a firm's average variable cost, the firm should remain open, but when operating below the break-even point (where price equals average cost), the firm faces a loss. The decision between continuing to produce at a loss or shutting down depends on which option results in the least financial loss. It’s important to operate above the break-even point to avoid losses or achieving a price that covers at least the average variable cost, thereby minimizing losses in the short run.
If a business's price is in the zone between the break-even point and the shutdown point (where price equals average variable cost), the business may decide to continue operating despite short-term losses because it covers the variable costs and contributes to fixed costs, slowing down overall losses.