A perfectly competitive firm is more likely to shut down during a recession, when the demand for its product declines, than during an economic expansion, because during the recession it might be unable to cover its

Question

Quizplus · Accepted Answer

A perfectly competitive firm will shut down in the short run if it cannot cover its variable costs, as these are the costs that can be avoided by not producing. Fixed costs are sunk in the short run and do not affect the shutdown decision.

A Perfectly Competitive Firm Is More Likely to Shut Down