Question

In the short run, when should a firm shut down its production?

Options

• When price is greater than average cost

• When price is equal to average variable cost

• When price is less than average variable cost

• When total revenue is greater than total cost

Answer 1

When price is less than average variable cost

Explanation:

If price is less than AVC, the firm cannot cover its variable costs from revenue, so it is better to shut down and bear only fixed costs.