According to marginal analysis, at what point should the owners of a failing factory decide to shut it down?

• A. When the factory's marginal cost equals marginal revenue
• B. When the factory's total revenue is less than its fixed costs
• C. When the factory's total revenue is less than its variable costs
• D. When the factory's total costs exceed its total revenue

Answer: (C)

Verified step by step guidance

1. Understand the concept of shutdown point in microeconomics: It is the point where a firm decides whether to continue operating or to shut down in the short run.
2. Recall that fixed costs are sunk in the short run and must be paid regardless of production, so the decision to shut down depends on variable costs and revenues.
3. Identify that the firm should continue operating as long as total revenue (TR) covers total variable costs (TVC), because it can contribute something towards fixed costs.
4. Formulate the shutdown rule: The firm should shut down if total revenue is less than total variable costs, i.e., \(TR < TVC\).
5. Relate this to marginal analysis: At the shutdown point, marginal revenue (MR) equals marginal cost (MC) at the minimum average variable cost (AVC), but the key condition is that total revenue does not cover variable costs.