In the short run, when the prevailing market price falls below the average variable cost curve, a firm in perfect competition will shut down because:
A) economic profit is zero.
B) price is less than marginal revenue.
C) marginal revenue is insufficient to pay average variable cost.
D) other firms will enter the market seeking profits.

Question

In the short run, when the prevailing market price falls below the average variable cost curve, a firm in perfect competition will shut down because: ​
A) ​economic profit is zero.
B) ​price is less than marginal revenue.
C) ​marginal revenue is insufficient to pay average variable cost.
D) ​other firms will enter the market seeking profits.

Quizplus · Accepted Answer

In the short run, a firm in perfect competition will shut down when the market price falls below the average variable cost curve because at such a price, the marginal revenue is insufficient to cover the average variable cost. If the firm continues to operate in the short run, it will incur losses that are greater than if it shut down. Therefore, the best choice is C.

In the Short Run, When the Prevailing Market Price Falls