In the short run, a firm should shut down its business if price is less than:

Question

Quizplus · Accepted Answer

A firm should shut down its business in the short run if the price is less than the average variable cost (AVC) because the firm cannot even cover its variable costs, which means that it is better to stop operations and minimize losses. If the price is greater than the AVC but less than the average total cost (ATC), the firm may continue to produce in the short run, but it will still incur losses. Therefore, choice A is incorrect. Choice B is also incorrect because the revenue (AR) alone does not indicate whether the firm is covering its costs or not. Similarly, choice C is incorrect because the marginal cost (MC) only shows the cost of producing an additional unit, but it does not account for the fixed costs that the firm has to pay regardless of output level.

In the Short Run, a Firm Should Shut Down Its