Figure 14-6
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 14-6. Firms will shut down in the short run if the market price
A)exceeds P3.
B)is less than P1.
C)is greater than P1 but less than P3.
D)exceeds P2.

Question

Figure 14-6
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-6. Firms will shut down in the short run if the market price
A)exceeds P3. 
B)is less than P1. 
C)is greater than P1 but less than P3. 
D)exceeds P2.

Quizplus · Accepted Answer

In the short run, a firm will only produce if the market price is greater than or equal to its minimum average variable cost (AVC) which is represented by point P1 on the graph. If the price is below P1, the firm will shut down as it cannot even cover its variable costs. Therefore, firms will shut down if the market price is less than P1, making B the correct choice.

Figure 14-6 Suppose a Firm Operating in a Competitive Market Has the Has