Suppose each firm operating in a competitive market has the following cost curves: ? MC ATC PS AVC P4 P3 P2 PI QI 02 Q3 04 Firms will shut down in the short run if the market price A

Economics Aug 06, 2020

Suppose each firm operating in a competitive market has the following cost curves: ? MC ATC PS AVC P4 P3 P2 PI QI 02 Q3 04 Firms will shut down in the short run if the market price A. exceeds P3 B. is less than P1. C. is greater than P1 but less than P3. D. exceeds P2.

Expert Solution

Option B.

When the market price falls below the minimum point of the short run average variable cost curve, then the firm shuts down iys operation because the firm cannot cover its variable cost. Thus, in the above case the firm will shut down when prices fall below P1. Thus, Option B is correct.

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