Table9-1 Negative Profits and the Firm’s Shut-Down Decision
will soon see, the firm’s best option in this case is to produce some output
even though its profits are still negative.)
A competitive firm may maximize its profits (or minimize its losses) by
producing zero output. The data in the table show costs and revenues at
various levels of output. The firm must pay its fixed costs even if it
produces no output and earns no revenue. At a price of $2, there is no
level of output at which the firm’s revenues cover its variable costs. In this
situation, the firm can minimize its losses by choosing to produce zero
output.
At a higher price of $5, the profit-maximizing firm should choose to
produce 70 units of output even though its profits are negative. At this
level of output, the firm’s revenues more than cover its variable costs and
help to pay some portion of the fixed costs. Since the firm must pay its
fixed costs no matter what level of output is produced, its profits would
be even lower if it chose to produce zero output.