A perfectly competitive firm shuts down in the short-run when the market price is less than the average variable cost.

Question

Quizplus · Accepted Answer

When the market price is less than the average variable cost, the firm is unable to cover its variable costs and will incur losses. In order to minimize losses, the firm will shut down and produce zero output in the short-run. This is a characteristic of a perfectly competitive market.

A Perfectly Competitive Firm Shuts Down in the Short-Run When