6 10 marks Should a firm ever produce if it is making a nega

6. (10 marks)

Should a firm ever produce if it is making a negative economic profit? Why or why not?

Solution

ANSWER:

The negative economic profit is incurred when total cost exceeds total revenue. When firms are earning negative economic profits they may continue the production because few firms will leave the market and as a result shifts the market supply to the left, and price rises. Thus firm may continue the production if it is making a negative economic profit in few cases.