If a competitive firm finds that it maximizes short-run profits by shutting down,which of the following must be true?

Question

Quizplus · Accepted Answer

If the firm finds that it maximizes short-run profits by shutting down, it means that its total revenue is not covering its variable costs. This is because if the firm keeps producing, it will incur both variable and fixed costs, leading to even larger losses. Therefore, the price (p) must be lower than the average variable cost (AVC) for all levels of output (i.e., p < AVC).

If a Competitive Firm Finds That It Maximizes Short-Run Profits