Under which of the following conditions will a profit-maximizing perfectly competitive firm shut down in the short run?
A) when it is making a normal profit
B) whenever its marginal cost is less than its marginal revenue
C) when the price is less than its minimum average variable cost
D) whenever its total cost is greater than its total revenue
E) when the price is less than its minimum average total cost

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm will shut down if the price is less than its minimum average variable cost. This is because even if the firm continues to produce, it will not be able to cover its variable costs and will incur losses that are greater than if it had simply shut down. If the price is equal to or greater than the minimum average variable cost, the firm will continue to produce in the short run, even if it is making a loss, as it can at least cover its variable costs. Thus, option A is not correct as the firm may continue to operate and make normal profit. Option B is incorrect as a profit-maximizing firm will produce as long as marginal revenue is greater than or equal to marginal cost. Option D is incorrect because if the firm's total revenue is greater than its total cost, it will make a profit, and hence will not shut down. Option E is incorrect since the firm will continue to produce as long as the price is greater than or equal to the minimum average total cost.

Under Which of the Following Conditions Will a Profit-Maximizing Perfectly