Question

The shutdown point for a profit maximizing competitive firm in the short run is when the market price is equal to the:

• A. Average fixed cost
• B. Total fixed cost
• C. Average variable cost
• D. Average total cost

Hint:

Relate shut down point to cost curves.

Answer 1

The Correct Option is C

In the short run, the shutdown point occurs when the market price is equal to the average variable cost (AVC). At this point, the firm is indifferent between producing and shutting down because it is not covering its fixed costs but can cover its variable costs. If the price falls below AVC, the firm will shut down to minimize losses. Hence, the correct answer is (c).