Question

Should a firm ever produce if it losing money (making a negative economic profit)? Why or why not?

Answer 1

Yes, firm will continue to produce if it is losing money or incurring a loss. Economic profit can be negative but operating profit can not be

This can be explained as follows:

1) when P< AC firm will be incurring a negative economic profit.In this case firm.will be able to recover its variable cost but does not recover its fixed cost. Hence in that case firm will continue to operate its business and earn negative economic profit

2) When P< AVC then firm is not able to recover its variable cost as well as fixed cost in that case firm will shut down its operations and firm does not produce anything firm will earn negative operating profit