A firm suffering losses in the short-run will continue to operate as long as its revenue is bigger than its sunk costs

Economics Nov 25, 2020

A firm suffering losses in the short-run will continue to operate as long as its revenue is bigger than its sunk costs.

Expert Solution

This statement is not correct. Sunk costs are no relevant in deciding about continuing to operate or shutting down. A loss making firm will continue to operate if its revenue is bigger than its variable cost (not sunk cost). This way it at least recovers a part of its fixed cost and can hope to make profits in the long run, i.e., when the fixed costs can also be variabalized.

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