Assume a firm is facing the following situation: At Q = 1,000,P = $10,MC = $10,ATC = $18,and AVC = $16.This firm should shut down and,in so doing,limit its losses to $2,000.

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The firm should shut down because the price ($10) is less than the average variable cost ($16), meaning it cannot cover its variable costs, leading to greater losses if it continues production. By shutting down, the firm limits its losses to its fixed costs, which are $2,000 in this case (calculated as ATC - AVC = $18 - $16 = $2 per unit, multiplied by 1,000 units).

Assume a Firm Is Facing the Following Situation: at Q