A firm suffering economic losses decides whether or not to produce in the short run on the basis of whether
A) revenues cover variable costs.
B) revenues from operating are sufficient to cover fixed costs.
C) revenues from operating are sufficient to cover fixed plus variable costs.
D) Firms suffering economic losses will always shut down.

Question

Quizplus · Accepted Answer

In the short run, a firm will continue to produce as long as the revenue it earns covers its variable costs, even if it's not covering its total costs (which include fixed costs). This is because fixed costs must be paid regardless of the firm's production decision, whereas variable costs can be avoided by not producing. If the firm can cover its variable costs, it can contribute to covering some of its fixed costs, which is better than not producing at all and covering none of its fixed costs.

A Firm Suffering Economic Losses Decides Whether or Not to Produce