In the short run, under what conditions should the firm shut down? average total cost at...

In the short run, under what conditions should the firm shut down?

average total cost at the minimum point

price greater than average variable cost

price less than average variable cost

marginal revenue greater than marginal cost

marginal revenue greater than average total cost

Expert Solution

SHORT RUN SHUT DOWN CONDITION FOR A FIRM:

A firm chooses to shut down the production when the revenue earned from the sale of goods and services cannot even cover the fixed cost of production.

Ideally we can observe firms shutting down if marginal revenue (MR) of the firm is below AVC(average variable cost ) at profit maximising level of output. In normal sceneraios a firm must earn revenue greater than total cost (i.e R>TC) in order to avoid losses. However in short run for a firm to keep operating in the market it should have it market price greater than average variable cost (i.e P>AVC) as in short run all fixed costs are sunk cost. Henc ewe can say the shut down rule is " in the short run firm should continue to operate if price exceeds AVC " (i.e P>AVC). Note the following points :

1. If P>ATC, then the firm will continue to produce and earn normal profit

2. If P>=AVC, then the firm will continue to produce in short run ande covers only the variable cost.

3. If P<AVC , then the firm unable to recover its variable cost and shuts down.

Rahul Sunny answered 2 years ago

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