Chapter8: Perefect Competition
Section: Chapter Questions
Problem 15SQ
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Question
What is the shutdown decision of the firm? How should a firm decide whether to continue business or shut down in the short run?
Expert Solution
Step 1
For a perfectly competitive company, where the total revenue of the company, i.e. the product of its price and quantity, is more than the average variable cost and less than the average total cost, the company is faced with a loss in the market and can continue to decide to close or to continue on a long-run basis.
But if the overall income of the business is less than the average variable cost, the very cost of production on the market will be lost and thus production will be stopped, i.e. shut down.
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