Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below
A) $5.
B) $10.
C) $15.
D) $20.

Question

Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below
A) $5. 
B) $10. 
C) $15. 
D) $20.

Quizplus · Accepted Answer

In the short run, the firm should shut down if the market price is below the minimum point of the average variable cost curve (AVC), which is $5 in this case. At this price, the firm is not able to cover its variable costs and would incur losses by producing. Therefore, it is better for the firm to shut down and minimize its losses.