A firm operating in a perfectly competitive industry will shut down in the short run but earn losses if the market price is less than that firm's average variable cost.

Question

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In the short run, a firm in a perfectly competitive market will shut down if the market price falls below its average variable cost because it cannot cover its variable costs, leading to a situation where it minimizes its losses by not producing at all.

A Firm Operating in a Perfectly Competitive Industry Will Shut