Final answer:
The decision to continue operating or shut down a firm facing economic losses revolves around whether the price covers the firm's marginal costs, thus contributing towards fixed costs, or whether shutting down to incur only fixed costs is less financially damaging.
Step-by-step explanation:
When a firm is facing economic losses, it must decide whether to continue operating or to shutdown. The firm should continue to produce the output at the level where price equals marginal revenue and equals marginal cost if by doing so, it covers its variable costs and contributes something towards fixed costs. If this condition is not met, it would be better for the firm to shut down and only incur its fixed costs. This decision is informed by conducting a cost/benefit analysis and comparing the firm's marginal costs and marginal benefits to determine the least damaging option financially.
In the long run, considering the firm's fixed and variable costs will help determine the profit-maximizing quantity to produce and the price to charge. When the price is below average variable cost, the company's best choice is the one that loses the least amount of money, even if that means shutting down in the short run.