If a competitive firm finds that it maximizes short-run profits by shutting down,which of the following must be TRUE?
A) p

Question

If a competitive firm finds that it maximizes short-run profits by shutting down,which of the following must be TRUE?
A) p < AVC for all levels of output.
B) p < AVC only for the level of output at which p = MC.
C) p < AVC only if the firm has no fixed costs.
D) The firm will earn zero profit.

Quizplus · Accepted Answer

If a competitive firm finds that it maximizes short-run profits by shutting down, this means that the revenue it can earn from selling its output is not enough to cover its variable costs. Therefore, the firm will shut down and incur no variable costs, avoiding losses that would have been incurred by continuing to produce. Thus, p < AVC for all levels of output.

If a Competitive Firm Finds That It Maximizes Short-Run Profits