In a perfectly competitive market, at the shutdown point, the price is equal to which of the following?

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

Answer: (C)

Verified step by step guidance

1. Understand the concept of the shutdown point in a perfectly competitive market: it is the price level at which a firm is indifferent between producing and shutting down in the short run.
2. Recall that the shutdown point occurs when the firm's revenue just covers its variable costs, meaning the firm cannot cover its fixed costs but is better off producing than shutting down if price covers variable costs.
3. Identify the relevant cost measures: Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC).
4. Recognize that at the shutdown point, the price equals the minimum of the Average Variable Cost (AVC) curve, because if price falls below AVC, the firm would minimize losses by shutting down.
5. Conclude that the shutdown price is where \(P = AVC_{min}\), not where price equals Marginal Cost, Average Fixed Cost, or Average Total Cost.