In the short run, a firm should shut down its operation if:

Question

Quizplus · Accepted Answer

The firm should shut down in the short run if its losses are greater than its total fixed costs (TFC) at the point where marginal revenue (MR) equals marginal cost (MC). This is because if the firm continues operating, it would only add to its losses. When losses are less than TFC, the firm should continue producing in the short run because it is still covering some of its fixed costs. When losses equal TFC, the firm is indifferent between continuing to produce or shutting down, but since it is not making any profit, it may choose to shut down and save on variable costs. TR being less than TC is not a sufficient condition on its own for shutting down, as this will depend on the level of fixed costs and the market conditions.

In the Short Run, a Firm Should Shut Down Its