Question

When determining whether to shut down in the short run, a competitive firm should ignore (i) fixed costs. (ii) variable costs. (iii) sunk costs. A. (ii) only B. (i) and (iii) only C. (iii) only D. (i), (ii), and (iii)

Answer 1

Answer:

B) (i) and (iii) only

• (i) fixed costs.
• (iii) sunk costs.

Explanation:

When a competitive firm must decide whether it shuts down or not in the short run, it must only focus on the variable costs and the marginal revenue. As long as the marginal revenue ≥ variable cost, then the firm should continue to operate in the short run, at least until the market stabilizes.