US Airways experienced huge losses for several years in the

U.S. Airways experienced huge losses for several years in the 1990s, yet it continued to operate its firm. Why didn\'t U.S. Airways shut down its operations to avoid the losses?

Solution

The fixed cost is the cost of equipment and land and other inputs that is fixed in the short run. Variable cost of a firm is the cost of its variable inputs, mainly labor. This depends on the level of output produced. The total cost is sum total of fixed cost plus variable cost for any given level of output.

Even if the firm incurs a negative economic profit it will not shut down in the short run as long as it can cover its variable cost. This is because; in the short run the firm has to pay the fixed cost even if it shuts down. As it continues its production it can earn as much to cover its variable cost and can minimize its loss from shutting down.