Should a competitive firm ever produce when its losing money? Why? Solution You
ID: 1230732 • Letter: S
Question
Should a competitive firm ever produce when its losing money? Why?Explanation / Answer
You should stop producing only if you are losing more money by producing than by shutting down. Loss > FC TC - Revenue > FC FC + VC - Revenue > FC VC - Revenue > 0 VC > Revenue That is, shut down if you can't afford to pay your workers. If you shut down, your profit will be negative. But if you shut down, you limit your losses to the amount of FC you have to pay. If VC > Revenue, you'd lose even more than FC by staying open. In general, if you are losing money, you have to decide whether shutting down or staying open will minimize your losses.