Chapter 11R, Problem 8MCQ

To determine

The correct option for given situation where the firm should shut down if it produces such output level.

Answer to Problem 8MCQ

Option a is correct answer.

Explanation of Solution

Given Information:

  

Calculation and Explanation for correct options:

Average variable cost is variable cost divided by quantity which is calculated as follows:

  

As per the given data, the firm should shut down below the average variable cost of $10. The firm should continue as long as its market price is above or equal to the AVC. If the market price is below $10 i.e. $8 then firm is unable to meet its variable cost requirement for producing even a single unit due to which firm should shut the production unit down. Since, option a is correct, the other options are invalid.

Economics Concept Introduction

Shut-down rule in short-run: In short-run, shut down price refers to the price per unit that is below the average variable cost per unit. The output level at which price is lower than the average variable cost then firm should shut it down.