Figure 13-6
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 13-6.Firms will shut down in the short run if the market price

Question

Figure 13-6
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 13-6.Firms will shut down in the short run if the market price

Quizplus · Accepted Answer

In the short run, firms will produce at the quantity where marginal cost equals price as long as the price is greater than or equal to average variable cost. In this case, that occurs at point A, where MC = P1. However, since the price is lower than average total cost at that quantity, the firm will still incur a loss. If the price is lower than P1, the firm would be better off shutting down and incurring a loss equal to its fixed costs (since it would still need to pay those even if it doesn't produce anything). Therefore, the firm will shut down if the price is less than P1.

Figure 13-6 Suppose a Firm Operating in a Competitive Market Has the Has