Should a firm operating in a competitive market produce and sell their output if they incur...

Should a firm operating in a competitive market produce and sell their output if they incur a loss and not a profit? Why or why not? How does the answer depend on the size of the loss?

Expert Solution

Yes!

Even firm makes losses ut should produce when price is greater than average variable cost.

There are two kind of cost, fixed cost and variable cost. Fixed cost doesn't changes with output. But variable cost change with output. So at every quantity even at 0 fixed cost will be same.

Whwn firm price ia above average variable cost, it covers the some portion of fixed cost which minimise the loss. If we shutdown, our loss will be fixed cost. But if we operate our loss will bw less than fixed cost as firm will earn more than its variable cost.

How does the depends on the size of loss.?

If price is below average variable cost. Firm should shutdown. But when price is above average variable cost. We can reduce the some portion of the loss of fixed cost after covering variable cost. That means if, loss is more than fixed cost firm should not operate but if the loss is less than fixed cost firm should operate.

Rahul Sunny answered 8 months ago

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