Question

“By definition, cost is zero if a firm does not hire any input. Hence cost-minimization essentially means shutting down the operation of the firm.” Do you agree with the statement? Justify you answer by giving an explanation from microeconomic theory.

Answer 1

An enterprise should compare both total income with the value of total variable costs when facing the problem of minimizing losses.The company minimizes losses in the production of such a volume of products, at which the gross costs at least exceed the gross income. However, the company is advised to minimize losses by closing production in the short-run.if a company shuts down and produces zero in the short term,the revenues will be zero.However, it can only avoid fixed costs by completely stopping operations.