A firm should shut down production when

Question

Quizplus · Accepted Answer

A firm should shut down production when price (P) is less than the minimum average variable cost (minimum AVC) because at that point the firm is not covering its variable costs and is incurring a loss on every unit produced. Shutting down production would be the more financially sound decision. If price is greater than minimum AVC, the firm is covering its variable costs and some of its fixed costs, and should continue producing. If price equals minimum average total cost (minimum ATC), the firm is covering both its variable and fixed costs, and is earning zero economic profit, which is still better than incurring a loss from shutting down.

A Firm Should Shut Down Production When