If a perfectly competitive firm is incurring an economic loss, it is always cost minimizing to shut down.

Question

Quizplus · Accepted Answer

A firm incurs an economic loss when its total revenue is less than its total costs. However, the decision to shut down in the short run depends on whether the firm can cover its variable costs. If the price is above the average variable cost, the firm should continue operating despite the loss, because it can cover its variable costs and contribute to fixed costs. Shutting down is only cost-minimizing if the revenue does not cover the variable costs, leading to a situation where losses would be greater if the firm continues to operate.

If a Perfectly Competitive Firm Is Incurring an Economic Loss