When a perfectly competitive firm decides to shut down, it is most likely that
A)marginal cost is above average variable cost.
B)marginal cost is above average total cost.
C)price is below the firm's average variable cost.
D)fixed costs exceed variable costs.

Question

Quizplus · Accepted Answer

When a firm shuts down, it stops producing in the short run. This decision is made when the price of the good is below the average variable cost of production. This means that the firm is unable to cover its variable costs by selling the good at the prevailing market price. If the firm were to continue producing, it would incur losses as its revenue would not cover its variable costs. Therefore, it is not profitable for the firm to continue production in such a situation, and it shuts down.

When a Perfectly Competitive Firm Decides to Shut Down, It