A competitive firm will shut down its operations in the short run when the market price falls below its
A) marginal revenue.
B) marginal cost.
C) average cost.
D) average variable cost.

Question

Quizplus · Accepted Answer

A competitive firm will shut down its operations in the short run when the price falls below its average variable cost because at that point, the firm is not able to cover even its variable costs and is better off shutting down production rather than continuing to operate at a loss. Marginal revenue, marginal cost, and average cost are important factors for long-run decision making but are not relevant in the short run decision to shut down operations.

A Competitive Firm Will Shut Down Its Operations in the Short