A profit-maximizing firm will shut down in the short run when
A)price is less than average variable cost.
B)price is less than average total cost.
C)average revenue is greater than marginal cost.
D)average revenue is greater than average fixed cost.

Question

Quizplus · Accepted Answer

In the short run, a firm should continue to operate as long as the revenue generated from selling its products or services covers its variable costs. If the price falls below average variable costs, the firm will not generate enough revenue to cover its variable costs and will operate at a loss. It is better to shut down and pay only the fixed costs, rather than operating at a loss and paying both fixed and variable costs. Therefore, a profit-maximizing firm will shut down in the short run when the price is less than average variable cost.

A Profit-Maximizing Firm Will Shut Down in the Short Run