A competitive firm faces fixed costs even if it produces zero output. If it starts producing and selling some output, which of the following would happen?
A) The firm's total costs would increase, and its losses may become larger.
B) The firm would earn revenues and will therefore earn positive profits.
C) The firm's total costs would decrease, allowing it to possibly earn profits.
D) The firm would earn revenues that are greater than its costs.

Question

Quizplus · Accepted Answer

Since the firm faces fixed costs even if it produces zero output, its total costs will increase when it starts producing and selling some output. If its revenue from selling the output is not enough to cover its total costs (including fixed costs), the firm would incur losses, which may become larger than before. Hence, option A is the best choice. Option B, C, and D are incorrect as they suggest that the firm would earn profits, which may not be the case if its revenue is not sufficient to cover all costs.

A Competitive Firm Faces Fixed Costs Even If It Produces