If a competitive firm suffers loss, it should:
A) always shut down.
B) shut down if its losses are greater than total fixed costs.
C) shut down if its total fixed costs are greater than losses.
D) raise its price.

Question

Quizplus · Accepted Answer

A competitive firm should shut down if its losses are greater than total fixed costs. This is because in the short run, fixed costs cannot be recovered and the firm would be better off shutting down temporarily and incurring only its fixed costs. If the firm continued to operate and incur both variable and fixed costs, it would only be adding to its losses. However, if the losses are less than the total fixed costs, the firm would still cover some of its fixed costs by operating and might choose to continue in the short run. Shutting down or raising its price is not always the best option in case of losses.

If a Competitive Firm Suffers Loss, It Should