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, a perfectly competitive firm should shut down if the market price falls below the minimum point on the average variable cost curve (where average variable cost intersects with marginal cost). In the given graph, this minimum point is at a quantity of 4 and an average variable cost of $5. Therefore, if the market price falls below $5, the firm should shut down in the short run. The correct answer is choice A.