In the standard model of pure competition, a profit-maximizing firm will shut down in the short run if price is below
A) marginal cost.
B) average cost.
C) average fixed cost.
D) average variable cost.

Question

Quizplus · Accepted Answer

In the short run, a profit-maximizing firm will shut down if price is below the minimum average variable cost needed to cover its variable costs. This is because the firm cannot recover its variable costs, which must still be paid even if the firm shuts down. If the firm continues to produce, it will only incur additional losses, which is not rational for a profit-maximizing firm. Therefore, option D, which corresponds to average variable cost, is the correct answer.

In the Standard Model of Pure Competition, a Profit-Maximizing Firm