In what situation should a firm shut down in the short run?

Question

Quizplus · Accepted Answer

In the short run, a firm should shut down if the price it receives for its goods or services is below its lowest average variable cost (AVC) at all output levels. This means that the firm is not covering even its variable costs and is incurring losses on every unit of output it produces. Shutting down in this situation would minimize the firm's losses. Options A and B are incorrect because fixed costs and total costs, respectively, are irrelevant in deciding whether to shut down in the short run since they cannot be changed in the short run. Option D is incorrect because if the price is above the lowest average variable cost but below the lowest average total cost (ATC), the firm should still produce in the short run, even if it is not earning a profit, because it is covering its variable costs and contributing towards paying fixed costs.

In What Situation Should a Firm Shut Down in the Short