Question

Under what circumstances would a perfectly competitive firm continue to produce even when it is losing money? Why would this be better than shutting down?

Answer 1

Under what circumstances would a perfectly competitive firm continue to produce even when it is losing money?

When it is minimising loss.

When price is above average variable cost.

Why would this be better than shutting down?:

Because when price is above average variable cost, it is covering some portion of fixed cost. It covers all variable costs and some portion of fixed cost. So loss will be remaining portion of fixed cost.

But when firm shutdowns, it's loss equal to fixed cost.

So when it produce, loss is some portion of fixed cost and when not then whole portion of fixed cost. So it will produce even if making losses when price is above average variable cost to minimise losses.

Note : fixed cost doesn't changes with output so at every level of output fixed cost remains same even if at 0 quantity.