Which of the following correctly identifies the price at which a firm should shut-down? a) Price is greater than the average variable cost

Accounting Dec 08, 2020

Which of the following correctly identifies the price at which a firm should shut-down?

a) Price is greater than the average variable cost.

b) Price is equal to the marginal cost.

c) Price is less than the total cost.

d) Price is less than the average variable cost.

Expert Solution

The correct answer is: d) Price is less than the average variable cost.

A competitive firm exits the market temporarily (shuts down) in the short-run if its average revenue is less than its average variable costs (P<AVC)(P<AVC). At this point, the firm is not making enough revenue to cater for its variable costs.

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