A monopoly shuts down when
A)the short run price is below its average variable costs.
B)the long run price is below its average variable costs.
C)the average cost is less than price.
D)never, because it can raise its prices as high as necessary to keep operating and maximize profits.

Question

Quizplus · Accepted Answer

A monopoly will shut down when the short run price is below its average variable costs because it is not able to cover its variable costs, meaning it is better off not producing anything at all. In the long run, the monopoly may be able to adjust its costs or exit the market altogether, but in the short run it cannot operate at a loss. Options B and D are incorrect because they do not accurately describe the conditions under which a monopoly would shut down. Option C is also incorrect because the average cost being less than price does not necessarily lead to shutdown, as the monopoly may still be earning a profit.

A Monopoly Shuts Down When