Q: A firm is producing where $MR = MC$ and $P > AVC$ but $P < ATC$. What is the firm’s economic profit?

Negative profit (loss), but should continue producing

Q: Why are fixed costs irrelevant to the short-run shutdown decision?

Because they must be paid whether the firm produces or not

Q: If a firm’s price is exactly equal to its minimum average variable cost, what is the firm’s best short-run decision?

Be indifferent between producing and shutting down

Q: Which of the following statements best describes a sunk cost?

A cost that cannot be recovered regardless of future actions

Q: Which of the following best explains why the minimum of the AVC curve is called the shutdown point?

Because it is the lowest price at which the firm will produce in the short run

Q: A firm’s marginal cost (MC) curve intersects the average variable cost (AVC) curve at its minimum. What does this imply about the shutdown decision?

This is the price below which the firm should shut down in the short run.

Q: If a firm’s price is above average variable cost but below average total cost, what is the firm covering?

Variable costs and part of fixed costs

Question 1

A firm is considering whether to continue production in the short run. Its total fixed costs are $1,000, and its total variable costs are $200. If the market price for its product falls below the minimum average variable cost (AVC), what should the firm do?

Accepted Answer

Shut down production temporarily.

Question 2

Which of the following costs is considered a sunk cost in the short-run shutdown decision?

Accepted Answer

Fixed costs that cannot be recovered

Question 3

Suppose a farmer pays $1,000 to rent a field (fixed cost) and $200 for seeds (variable cost). If the revenue from sales is $500, what is the farmer's profit or loss if they produce?

Accepted Answer

$700 loss

Question 4

What is the mathematical condition for a firm to shut down in the short run?

Accepted Answer

$P < AVC$

Question 5

If a firm’s total revenue ($TR$) is less than its total variable cost ($VC$), what should the firm do in the short run?

Accepted Answer

Shut down production.

Question 6

Which curve’s minimum point determines the short-run shutdown point for a firm?

Accepted Answer

Average Variable Cost (AVC)

Question 7

A firm is producing where $MR = MC$ and $P > AVC$ but $P < ATC$. What is the firm’s economic profit?

Accepted Answer

Negative profit (loss), but should continue producing

Question 8

Why are fixed costs irrelevant to the short-run shutdown decision?

Accepted Answer

Because they must be paid whether the firm produces or not

Question 9

If a firm’s price is exactly equal to its minimum average variable cost, what is the firm’s best short-run decision?

Accepted Answer

Be indifferent between producing and shutting down

Question 10

Which of the following statements best describes a sunk cost?

Accepted Answer

A cost that cannot be recovered regardless of future actions

Question 11

A firm faces the following costs: $FC = 1,000$, $VC = 500$, and $TR = 1,200$. Should the firm produce in the short run?

Accepted Answer

Yes, because $TR > VC$

Question 12

Which of the following is true about a firm that exits the market?

Accepted Answer

It produces no output and incurs no costs in the long run.

Question 13

In the short run, which cost must a firm continue to pay even if it shuts down?

Accepted Answer

Fixed cost

Question 14

If a firm’s total revenue is $800$, total variable cost is $900$, and total fixed cost is $500$, what is the firm’s best short-run decision?

Accepted Answer

Shut down because $TR < VC$

Question 15

Which of the following best explains why the minimum of the AVC curve is called the shutdown point?

Accepted Answer

Because it is the lowest price at which the firm will produce in the short run

Question 16

A firm’s marginal cost (MC) curve intersects the average variable cost (AVC) curve at its minimum. What does this imply about the shutdown decision?

Accepted Answer

This is the price below which the firm should shut down in the short run.

Question 17

If a firm’s price is above average variable cost but below average total cost, what is the firm covering?

Accepted Answer

Variable costs and part of fixed costs

Question 18

Which of the following is NOT a relevant cost in the short-run shutdown decision?

Accepted Answer

Fixed cost

Question 19

A firm’s total cost is $1,500$, total variable cost is $600$, and total revenue is $700$. Should the firm shut down in the short run?

Accepted Answer

Yes, because $TR < VC$

Question 20

Which of the following best describes the difference between shutting down and exiting the market?

Accepted Answer

Shutting down is temporary; exiting is permanent.

Short-Run Shutdown Decision in Microeconomics

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