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Short Run Shutdown Decision quiz

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  • What is the key difference between a firm shutdown and a firm exit?
    A shutdown is temporary and occurs in the short run, while an exit is permanent and happens in the long run.
  • In the short run, which costs are relevant for a firm's shutdown decision?
    Variable costs are relevant because fixed costs are sunk and must be paid regardless of production.
  • What is a sunk cost in the context of a firm's shutdown decision?
    A sunk cost is a cost that cannot be recovered, such as rent already paid for a factory or field.
  • When should a firm shut down in the short run according to the average variable cost?
    A firm should shut down if the market price falls below the minimum average variable cost.
  • What is the shutdown point for a firm in perfect competition?
    The shutdown point is where the price equals the minimum of the average variable cost curve.
  • How does a firm decide whether to produce or not based on total revenue and variable cost?
    A firm should produce if total revenue is greater than variable cost; otherwise, it should shut down.
  • What happens to a firm’s losses if it shuts down in the short run?
    The firm’s losses are equal to its fixed costs, which are unavoidable and sunk.
  • How is average revenue related to price in perfect competition?
    Average revenue is equal to price in perfect competition.
  • What is the condition for shutdown when comparing price and average variable cost?
    A firm will shut down if price is less than average variable cost.
  • When does average variable cost become important in perfect competition?
    Average variable cost is only important for short run shutdown decisions in perfect competition.
  • Where does a firm produce if it decides to stay open in the short run?
    A firm produces where marginal revenue equals marginal cost.
  • How does a firm determine if it is making a profit or loss when producing?
    A firm checks if price is above average total cost for profit, or below for loss.
  • What happens if price is above average variable cost but below average total cost?
    The firm produces but incurs a loss, as it covers variable costs but not total costs.
  • If price is below average variable cost, what should the firm do?
    The firm should shut down and not produce any output.
  • What is the loss a firm faces if it shuts down at a price below average variable cost?
    The loss is equal to the fixed costs, since variable costs are avoided by not producing.