A perfectly competitive firm should shut down in the short-run if price falls below the minimum of
A) marginal cost.
B) marginal revenue.
C) average total cost.
D) fixed costs.
E) average variable costs.

Question

Quizplus · Accepted Answer

In the short-run, a perfectly competitive firm should shut down if price falls below its average variable costs. This is because the firm would not even be able to cover its variable costs, let alone its fixed costs, and would be better off shutting down operations temporarily. Shutting down would minimize losses and allow the firm to reevaluate its production decisions. Thus, the best choice is E, as it is the only option that considers the firm's variable costs.

A Perfectly Competitive Firm Should Shut Down in the Short-Run