A firm's marginal cost has a minimum value of $2; its average variable cost has a minimum value of $5; and its average total cost has a minimum value of $7.At what product price will the firm shut down

Question

Quizplus · Accepted Answer

The firm will shut down when the price is below its minimum average variable cost ($5). However, since the marginal cost is lower than the minimum average variable cost, the firm is still producing even when it is making losses. Therefore, the price should cover both the average variable cost and a portion of the fixed costs in order for the firm to continue producing in the short run. This means the price should be above the minimum average total cost ($7). 
To break even, the price should cover both the average variable cost and the average fixed cost. Since the minimum average variable cost is $5, and we know the minimum average total cost is $7, the difference between the two ($2) represents the fixed costs. 
Thus, price = average variable cost + fixed costs = $5 + $2 = $7.
Therefore, the firm will shut down if the price is below $7, and will continue to produce in the short run if the price is above $7. 
Option C is the only choice above $11 and satisfies the condition for the firm to continue producing in the short run.

A Firm's Marginal Cost Has a Minimum Value of $2;