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How do firms survive by charging at marginal costs? If firms do not cover their fixed costs, wouldn't they eventually leave?

Economics Dec 12, 2020

How do firms survive by charging at marginal costs? If firms do not cover their fixed costs, wouldn't they eventually leave?

Expert Solution

In perfect competition, profit maximisation means price is equal to marginal cost. In monopoly and monopolistic competition, profit maximising condition is marginal revenue is equal to marginal cost and price is got from demand curve. So, profit maximisation equilibrium condition runs businesses in economics implies firms survive by charging at marginal cost.

If fixed costs are getting covered by prices, firms are earning normal profits. If fixed costs are not getting covered, firm is operating in loss and will shut down business.

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