Assume a firm taking a loss will minimize that loss if it keeps producing rather than shut down. Based on this, you know that if the firm produces its price will cover:
A) all of its costs.
B) all of its variable costs and some of its fixed costs.
C) part of its variable costs and none of its fixed costs.
D) none of the above.

Question

Quizplus · Accepted Answer

When a firm decides to keep producing despite taking a loss, it does so because the price it receives for its products covers all of its variable costs and at least part of its fixed costs. This means that the revenue generated from selling the goods is enough to cover the variable costs of production (like labor and raw materials) and contributes towards covering fixed costs (like rent and salaries), which the firm would have to pay regardless of its production decision. Shutting down would mean the firm covers none of its costs, so continuing production minimizes the loss by covering variable costs and some fixed costs.

Assume a Firm Taking a Loss Will Minimize That Loss