At which point will a firm be indifferent between shutting down and continuing to produce in the short run?

• A. When price equals average total cost (P = ATC)
• B. When price equals average variable cost (P = AVC)
• C. When price equals fixed cost (P = FC)
• D. When price equals marginal cost (P = MC)

Answer: (B)

Verified step by step guidance

1. Understand the shutdown decision in the short run: A firm will compare the price (P) it receives for its product to its costs to decide whether to continue producing or shut down temporarily.
2. Recall that fixed costs (FC) are sunk in the short run and must be paid regardless of production, so the shutdown decision depends on variable costs.
3. Identify the key cost measures: Average Variable Cost (AVC) is the variable cost per unit of output, and Average Total Cost (ATC) includes both fixed and variable costs per unit.
4. Recognize that the firm will be indifferent between producing and shutting down when the price just covers the average variable cost, i.e., when \(P = AVC\).
5. At this point, producing yields zero contribution to fixed costs but avoids losses greater than fixed costs, so the firm is indifferent between continuing production and shutting down.