"Even if a firm may sell its product at a price less than the average total...

"Even if a firm may sell its product at a price less than the average total cost, it may not shut down its operation." Explain with reference to the shut-down point.

please write out answer versus charting it

Expert Solution

This statement is true with reference to the short run. In short run, even when Average Revenue (AR) < Average Total Cost (ATC) firm may continue to produce if its earning operating profit. Operating profit is the difference between Total Revenue (TR) and Total Variable Cost (TVC) and it is the level of profit which is just necessary for the firm to continue production. This means when even though price (TR/Q) is less than ATC but as long as it is greater than Average Variable Cost (AVC) (AVC = TVC/Q), it will continue production. When Price = minimum of AVC it is known as the shutdown point. Shut-down point is the point at which firm receives no benefit from production so it may shut-down temporarily. So in the short run, shutdown point is not reached just when price is less than the ATC. For complete shutdown, Price should be less than AVC.
Thus, even if a firm sell its product at a price less than the ATC, it may not shut down its operation as long as it is earning operating profit.

Rahul Sunny answered 2 years ago

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