A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits.

Question

Quizplus · Accepted Answer

A firm will shut down in the short run if its total revenue is less than its variable costs, not necessarily when economic profits fall to zero. Economic profits include both explicit and implicit costs, whereas a firm might still cover its variable costs and some fixed costs even when making zero economic profit, thus not necessarily incurring negative accounting profits.

A Firm Operating in a Perfectly Competitive Industry Will Shut