Consider the following figure that shows the demand and the cost curves of a perfectly competitive firm. _____, the firm will shut down in the short run.
Figure 8.6

Question

Consider the following figure that shows the demand and the cost curves of a perfectly competitive firm. _____, the firm will shut down in the short run. ​
Figure 8.6
​

Quizplus · Accepted Answer

At a price below P₃, the demand curve intersects the average variable cost (AVC) curve at a point below the average total cost (ATC) curve. This means that the firm is not able to cover its variable costs in the short run, and therefore it would choose to shut down. At any price above P₃, the demand curve intersects the ATC curve, which means that the firm is able to cover both its variable and fixed costs and earn a profit. Thus, it would not shut down.

Consider the Following Figure That Shows the Demand and the Cost