Question

1. On what basis does a firm decide whether or not to shut down?
2. On what basis does it decide whether or not to go out of business?

Answer 1

1. A firm decide on its revenue and cost basis whether to shut down or not its operations.

Like for a firm shut down point is a point where the revenue earned by the firm is not enough to cover its average cost i.e. when AC>AR.

so when firm produces at that level of output where AC>AR it shuts down its business.

firm continuues to prouduce until it reaches the shut down point.

2. A firm decides whether to go out of business or not on following basis.

a) whether the firm is earning profits or not. when a firm incurs losses because of any reason like enterance of new competitors, new and better product offerings by their rivals their sales tend to decrease because of which their profits reduces and when it produces the product below break even point i.e. TR=TC then it incurs losses and firm can't survive in th market and it has to exit the industry.

PFA below the graph depiciting break even analysis in which u can see that whenever TC>TR that situation is for losses