A firm is currently producing at the rate of output at which total revenues just cover its total variable costs. If demand falls, the firm should

Question

Quizplus · Accepted Answer

If demand falls, the firm will not be able to cover its fixed costs in addition to its variable costs, thus it should shut down to minimize its losses. Lowering price and output rate may still not be enough to cover fixed costs, and increasing output rate may lead to even more losses. Therefore, shutting down is the best choice in this situation.

A Firm Is Currently Producing at the Rate of Output