Final answer:
Touchstone RE can generate losses in the short run by operating while only covering variable costs or in the long run by reaching the shutdown point where they must confront fixed costs without any production.
Step-by-step explanation:
When considering how Touchstone RE, or any business, can generate losses, there are two main scenarios to examine. The first is during the short run where a business might continue operating despite losses if it can cover its variable costs with its revenue. This means the company is able to cover costs that change with the level of output, like raw materials and labor, but not necessarily fixed costs such as rent, equipment, and salaries for permanent staff. However, if these losses persist methodically, Touchstone RE may reach what is known as the shutdown point.
The shutdown point is crucial for a firm facing losses. It represents the moment when the firm decides whether it is better to continue producing or to shut down temporarily. If the business shuts down, it can eliminate variable costs but still must confront the losses incurred through fixed costs, which are unavoidable in the short run. In the long run, if the pattern of losses is sustained, the firm may decide to exit the market by ceasing production completely. Thus, the two ways Touchstone RE can generate losses are through extended short-term operation while covering only variable costs and through shutdown where they continue to incur fixed costs with no production.