If a perfectly competitive firm is faced with average revenue below average variable cost it will shut down so as to reduce its

Question

Quizplus · Accepted Answer

When a perfectly competitive firm is faced with average revenue below average variable cost, it will shut down in the short run. This means that it will not produce any output, so its variable costs will be zero. However, it will still have to pay its fixed costs, which are sunk costs and cannot be recovered. Therefore, the firm's losses will be equal to its fixed costs. By shutting down, the firm is reducing its losses to the amount of its fixed costs.

If a Perfectly Competitive Firm Is Faced with Average Revenue