Question

Which one of the following is the shut-down condition for a profit-maximizing firm in a perfectly competitive market? P - Price, AVC - Average Variable Cost, ATC - Average Total Cost

• A. \( P<AVC \)
• B. \( P>AVC \)
• C. \( P<ATC \)
• D. \( P>ATC \)

Hint:

In the short run, a firm will continue producing as long as it can cover its variable costs. If price falls below AVC, the firm shuts down.

Answer 1

The Correct Option is A

Step 1: Understand the shut-down condition.
In a perfectly competitive market, a firm maximizes profit by producing at the point where marginal cost equals marginal revenue. However, if the price falls below average variable cost (AVC), the firm cannot cover its variable costs, and it will choose to shut down in the short run.
Step 2: Explain the shut-down condition.
A firm will shut down if it cannot cover its variable costs, which happens when the price is less than the average variable cost (AVC). At this point, the firm incurs a loss equal to its fixed costs.
Thus, the shut-down condition is \( P<AVC \), meaning the price is less than the average variable cost.
Final Answer: \[ \boxed{P<AVC} \]