"I'm losing money, but having invested so much in equipment, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be
A) correct if the firm is covering its fixed costs.
B) incorrect because a firm experiencing economic losses should never continue to operate.
C) correct if the firm is covering its variable costs and expects the price of its product to rise in the near future.
D) incorrect since the firm's fixed costs are sunk costs.

Question

Quizplus · Accepted Answer

If the firm is covering its variable costs and expects the price of its product to rise in the near future, it may be rational for the firm to continue operating in the short run since it may be able to cover its fixed costs and earn some contribution toward those costs. Additionally, if the firm already has a significant investment in equipment, it may be difficult or costly to shut down the operation and liquidate the assets. Therefore, the decision to continue operating may be the best short-term option for the firm, even if it is losing money currently.

"I'm Losing Money, but Having Invested So Much in Equipment