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In: Economics

How does a company decide whether or not to shut down? What is the rule they...

How does a company decide whether or not to shut down? What is the rule they should follow? Explain in your own words what the rule would be.

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Expert Solution

A firm will continue to produce even in the short run when the price is above the average variable cost of the good produced.

For a firm, under the perfect market condition, the supply curve or the good the firm will supply in the short run starts from the point where the marginal cost curve crosses the average variable cost. Average variable cost curve of the firm is the cost which the firm has incurred in form of input which is not fixed and change with the production. These costs include labor, electricity etc.

IF the cost is equal to the average variable cost it means that the firm is able to pay the variable is used in the production though they are not making any profit on it. If the price goes below this point it will mean as the firm is producing they are not even able to take out the production cost that product and if they produce more they will be losing more. At this point, the firm will shut down the production.

Rahul Sunny answered 1 year ago
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