Refer to Figure 14-1. The firm should shut down if the market price is:

• A. less than average variable cost
• B. greater than average variable cost but less than average total cost
• C. equal to marginal cost
• D. greater than average total cost

Answer: (A)

Verified step by step guidance

1. Understand the shutdown rule in microeconomics: A firm should shut down in the short run if the market price is less than the minimum average variable cost (AVC). This is because the firm cannot cover its variable costs and would minimize losses by not producing.
2. Recall the definitions: Average Variable Cost (AVC) is the variable cost per unit of output, Average Total Cost (ATC) includes both fixed and variable costs per unit, and Marginal Cost (MC) is the cost of producing one more unit of output.
3. Analyze the price relative to costs: If the price is below AVC, the firm loses more by producing than by shutting down. If the price is between AVC and ATC, the firm covers variable costs but not total costs, so it continues operating to minimize losses.
4. Note that if the price equals MC, it indicates profit maximization or loss minimization at that output level, but it does not determine shutdown by itself.
5. Conclude that the firm should shut down if the market price is less than AVC, because producing would increase losses beyond fixed costs.