Chapter 59, Problem 4MCQ

To determine

To determine the shutdown point.

Answer to Problem 4MCQ

(d) Minimum AVC.

Explanation of Solution

In the short run, the profit-maximizing firm will operate only if it can generate enough revenue to cover its variable costs. At the minimum of AVC, the firm will be earning just enough to cover the costs of the variable inputs bearing the loss equal to the cost of fixed input. The firm will produce at higher price levels or price levels just enough to cover AVC. Hence (d) is the right answer.

At the price higher than the minimum of AVC, the revenue will be more than just variable costs and cover a portion of fixed costs. The firm will be able to generate normal profit if the price equals the per unit cost of the product. In the short-run analysis, fixed costs are considered irrelevant. Hence options (a), (b), (c), and (e) will be incorrect answers.

Economics Concept Introduction

Introduction:

The shutdown point of the firm is the minimum average variable cost of production. Below this price level, the firm will stop producing. At this level, the price is just enough to cover the per unit variable costs incurring losses equal to the average fixed costs. If the price falls below this, the firm will cease to operate.