Question:
In order to minimize short-run losses, under which of the following conditions a profit-maximizing firm in a competitive market will necessarily shut down production?
(1) Total revenue is less than the total cost.
(2) Marginal cost is greater than the average total cost.
(3) Marginal cost is less than the marginal revenue.
(4) Average revenue is less than the average variable cost.
(5) Average revenue is less than the average total cost.
Correct Answer:
(4)
Answer Explanation:
A competitive firm will shut down in the short run if the price (Average Revenue) falls below the Average Variable Cost (AVC). At this point, the firm cannot even cover its day-to-day operating costs, so it minimizes losses by halting production.
Topic: Market Structures Year: 2023
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