Question 1

A firm is considering whether to shut down in the short run. Which of the following is the correct condition for a short-run shutdown?

Accepted Answer

Shut down if $$P \u003c AVC$$

Question 2

Suppose a farmer pays $$1,000 to rent a field for the season (fixed cost) and 200 $$for seeds (variable cost). If the revenue from sales is $500, should the farmer produce in the short run?

Accepted Answer

Yes, because total revenue covers variable cost

Question 3

Which cost is considered a sunk cost in the short-run shutdown decision?

Accepted Answer

Fixed cost

Question 4

If a firm’s total revenue is less than its variable cost ($$TR \u003c VC$$), what should the firm do in the short run?

Accepted Answer

Shut down production

Question 5

What is the shutdown point in the context of a firm’s cost curves?

Accepted Answer

The minimum of the average variable cost curve

Question 6

Which of the following statements is TRUE regarding fixed costs in the short run?

Accepted Answer

Fixed costs must be paid even if the firm shuts down

Question 7

A firm’s marginal cost ($$MC) $$curve intersects the average variable cost ($$AVC) $$curve at its minimum. What does this point represent?

Accepted Answer

The shutdown point

Question 8

If the market price is above average variable cost but below average total cost ($$AVC \u003c P \u003c ATC$$), what should a firm do in the short run?

Accepted Answer

Continue producing to cover variable costs and part of fixed costs

Question 9

Which of the following best describes a sunk cost?

Accepted Answer

A cost that cannot be recovered regardless of future actions

Question 10

A firm is producing where $$MR = MC$$ and $$P \u003e AVC$$ but $$P \u003c ATC. $$What is the firm’s economic profit?

Accepted Answer

Negative

Question 11

Why is average variable cost ($$AVC) $$the relevant cost curve for the short-run shutdown decision?

Accepted Answer

Because variable costs must be covered to justify production

Question 12

If a firm’s total revenue is $$400$$, variable cost is $$500$$, and fixed cost is $$300$$, what should the firm do in the short run?

Accepted Answer

Shut down because $$TR \u003c VC$$

Question 13

Which of the following is NOT a characteristic of a short-run shutdown?

Accepted Answer

The firm exits the market permanently

Question 14

Suppose a firm faces the following: $$P = 10$$, $$AVC = 8$$, $$ATC = 12. $$What should the firm do in the short run?

Accepted Answer

Produce because $$P \u003e AVC$$

Question 15

If a firm’s fixed costs increase, how does this affect the short-run shutdown decision?

Accepted Answer

There is no effect on the shutdown decision

Question 16

Which equation correctly represents the shutdown rule in terms of average costs?

Accepted Answer

$$P \u003c AVC$$

Question 17

A firm’s total cost is $$1,500$$, variable cost is $$600$$, and total revenue is $$700. $$Should the firm shut down in the short run?

Accepted Answer

No, because $$TR \u003e VC$$

Question 18

Which of the following best describes the difference between a shutdown and an exit?

Accepted Answer

Shutdown is temporary, exit is permanent

Question 19

If a firm’s price falls below the minimum of the average variable cost curve, what happens to its output?

Accepted Answer

Output falls to zero

Question 20

Why are fixed costs considered sunk in the short run?

Accepted Answer

Because they must be paid regardless of production

Short-Run Shutdown Decision in Microeconomics

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