If a firm is producing where price exceeds average variable cost, the firm should continue production even though it will incur a loss, since: the loss will quickly revert to a profit. it can cover its variable costs (payroll, utilities, etc.) and have some funds left over to apply toward paying fixed costs. it must adhere to union rules against layoffs. it is important to show stockholders that the company can turn itself around.

Brian has just finished college. he wants to set up a small business to make and sell fireworks. he registers his company and acquires a license from the government. he finds that most of his competitors are selling fireworks at an extremely low price. he would like to make more money, so he decides to innovate and develop better fireworks. he sells his fireworks at a higher price, and they are a huge hit with the customers. after a few years, he earns enough profit to set up a bigger fireworks factory that complies with the government’s health and safety regulations. he even starts exporting fireworks overseas. which type of economy does this scenario describe?