Based on the information in the chart, at which price will a firm shut down in the short run?

• A. At any price below the average variable cost (AVC)
• B. At any price below the average total cost (ATC)
• C. At any price above the marginal cost (MC)
• D. At any price equal to the average fixed cost (AFC)

Answer: (A)

Verified step by step guidance

1. Understand the shutdown rule in microeconomics: A firm will decide to shut down in the short run if the price it receives for its product is less than its average variable cost (AVC). This is because the firm cannot cover its variable costs, and continuing production would increase losses.
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, Marginal Cost (MC) is the cost of producing one more unit, and Average Fixed Cost (AFC) is the fixed cost per unit.
3. Analyze why the firm shuts down when price < AVC: If the price is below AVC, the revenue from selling the product does not cover the variable costs, so the firm loses more by producing than by shutting down and only incurring fixed costs.
4. Compare the other options: Price below ATC means the firm is making a loss but may still cover variable costs; price above MC relates to profit maximization, not shutdown; price equal to AFC is not relevant for shutdown decisions.
5. Conclude that the correct shutdown point is when the price falls below AVC, as this is the threshold where continuing production is no longer economically viable in the short run.