Question

The shut-down price is:

option A:the price at which economic profit is zero.

option B:the minimum of the AVC curve.

option C: the intersection of the MC and ATC curves.

option D: the minimum of the AFC curve.

Answer 1

Answer-option B. The minimum of the AVC curve.

Shut down price is the price which is less than average variable cost i.e., minimum of average variable cost. When price is less than average variable cost, then losses in case producing are fixed costs plus variable costs. When the firm produces nothing (shut down) , fixed costs are to be incurred. Hence losses in case of producing nothing is equal to fixed costs. When price is less than average variable cost ( i.e., price is equal to minimum of AVC), then losses in case of producing are more than losses in case of not producing ( i.e., shut down). Hence, to minimize losses, firm decides to shut down. The price at which firm decides to shut down is called shut down price and shut down price is minimum of AVC.

Option A is incorrect because the price at which economic profit is zero is not the shut down price. When firm is earning zero economic profits it means that price is able to cover all the costs i.e., price equal average total cost. Since price is able to cover all the costs, this is not shut down price.

Option C is incorrect because MC curve intersects ATC curve at it's minimum. Price where MC curve intersects ATC curve will cover all the costs and hence no losses will be incurred. Hence, this is not the shut down price.

Option D is incorrect because shut down price is determined by variable costs and not average fixed cost.