Question

When the firms in the industry are just able to cover their cost of production, economic profit is zero. Therefore, if demand falls, causing prices to go down even a little bit, all of the firms in the industry will be driven out of business." True or false? Explain

Answer 1

The correct answer is false.

Step-by-step explanation:

A firm incurs both variable cost and fixed cost in the short run. If the firm is able to cover the variable cost in the short run it will continue operating. However, if it is not able to cover its variable cost it will stop operating.

So, if the demand falls such that total revenue is not able to cover total cost but the variable cost is being covered, the firm will not stop production.

In the long run, all the costs are variable. So when the revenue is not able to cover cost, the firms will stop operating.