In the short run, a purely competitive seller will shut down if
A) it cannot produce at an economic profit.
B) price is less than average variable cost at all outputs.
C) price is less than average fixed cost at all outputs.
D) there is no point at which marginal revenue and marginal cost are equal.

Question

Quizplus · Accepted Answer

A purely competitive seller will only continue to produce as long as it can cover its variable costs. If the price is less than the average variable cost at all outputs, the seller will not have enough revenue to cover its variable costs, and thus will shut down in the short run. Option A is incorrect because a seller may choose to produce even if it cannot make an economic profit, as long as it can cover its variable costs. Option C is incorrect because average fixed cost is not considered in the short-run shutdown decision. Option D is incorrect because a seller will continue to produce as long as price is above its marginal cost, regardless of whether or not marginal revenue equals marginal cost.

In the Short Run, a Purely Competitive Seller Will Shut