Question

a firm incurring economic losses in the short run will always shut down. is this statement true or false? explain. when exactly will a firm shut down in the short run?

Answer 1

Answer.) Given statement is FALSE. Losses occur when revenues fails to cover total costs. If revenues are greater than variable costs but less than total costs, it's advised to firm to produce in short run rather than shutting down, even though firm is generation losses. It's because the firm will stuck all its it's fixed costs and have no revenue if it shuts down, so loss will be same as the fixed cost. But if it continues to produce, however, and revenues are greater than variable costs, the firm can pay some of it's fixed cost, so it's loss will lower than the case in which firms shuts down its business. In the long-run , all costs are variable, thus all costs must be covered if the firm is to remain in business.

The firm should shut down even in short run if its revenues only cover fixed cost and no more than that.