Answer to Question #214992 in Economics of Enterprise for Mabongo Motswi

Question

Any firm should:

Cease production if total revenue is not sufficient to cover total cost

Answer 1

Any firm should:

Cease production if total revenue is not sufficient to cover total cost - No

When any firm is faced with a situation where its total revenue does not cover total cost, it should make the decision to either continue production or stop production by comparing the total revenue its generating to its total variable cost.

When the total revenue a firm is generating is higher than the firm's total variable cost, then the firm's decision should be to continue production. This is because the firm is already covering all its variable cost and a part of its fixed cost. The decision to cease production at this point would lead to higher costs for the firm because it still would incur the fixed cost in full amount.

On the other hand, when a firm's total revenue generated does not meet the total variable cost, the firm's decision should be to cease production. This is because the firm cannot meet its production costs as it stands. Ceasing production minimizes the costs the firm faces as it only has to cover its fixed costs.