Question

. In the short run, a firm operating in a competitive industry will shut down if price is a. less than average total cost. b. greater than average variable cost but less than average total cost. c. greater than marginal cost. d. less than average variable cost.

Answer 1

Answer:

The answer is: D) less than average variable cost.

Explanation:

If a company shuts down its production temporarily (not permanently), it will stop receiving revenue from the goods it used to produce but at the same time it will not be spending any money on variable costs. The company will suffer losses equivalent to its fixed costs (e.g. depreciation costs, rent, etc.).

A company decides to shut down its production when the revenue it receives from selling its products doesn't even cover their variable costs. That means it is losing money by producing its goods.