Question

A perfectly competitive firm will minimize its losses by shutting down when:

Answer 1

Answer:

A perfectly competitive firm will minimize its losses by shutting down when: P < TFC at the profit-maximizing level of output. P < MC at the profit-maximizing level of output.

Explanation:

A firm will choose to implement a production shutdown when the revenue received from the sale of the goods or services produced cannot cover the variable costs of production. In this situation, a firm will lose more money when it produces goods than if it does not produce goods at all. Producing a lower output would only add to the financial losses, so a complete shutdown is required. If a firm decreased production it would still acquire variable costs not covered by revenue as well as fixed costs (costs inevitably incurred). By stopping production the firm only loses the fixed costs.