Question

In: Economics

A profit-maximizing firm should shut down in the short run if: Answer choices: price is greater...

A profit-maximizing firm should shut down in the short run if:

Answer choices:

price is greater than marginal cost.

   

total revenue is less than total variable cost.

   

the firm is earning less than a normal rate of return.

   

the firm is not able to cover its overhead expenses.

   

marginal cost is higher than average cost.

Solutions

Expert Solution

Option B

  • A firm earns profits as long as its price exceeds Average variable costs or equals it.
  • Only when this condition is satisfied , the firm can continue to operate in the short run.
  • When the total revenue starts to fall below the variable cost then the firm will no longer earn economic profits.
  • This will no longer allow them to operate in the market and hence the profit maximizing firms should shut down.

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