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A profit-maximizing firm will shut down in the short run when a
A profit-maximizing firm will shut down in the short run when
a. price is less than the average variable cost.
b. price is less than the average total cost.
c. average revenue is greater than marginal cost.
d. average revenue is greater than the average fixed cost.
Expert Solution
The correct answer is: a. price is less than the average variable cost.
In the short-run, if a firm is not able to produce enough revenue to cover its variable costs, the firm is better off shutting down and avoid the variable costs. This happens when the price charged by the firm is below the firm's average variable cost.
The Average Variable Cost:
The average variable cost is the variable cost per unit of output produced. It is equal to the total variable cost divided by the total output produced. The average variable cost is used to make production decisions in for a firm operating in the short-run.
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