When firm should shut down?For a multi-product firm, shutdown occurs when average marginal revenue drops below average variable costs. A firm might reach its shutdown point for reasons that range from standard diminishing marginal returns to declining market prices for its merchandise.
Which of the following correctly explains when a firm will choose to shut down?Which of the following correctly describes when a firm in a competitive market should shut down in the short run? A firm will shut down in the short run when price is less than average variable cost.
At what price will the firm decide to shut down in the short run?A business needs to make at least normal profit in the long run to justify remaining in an industry but in the short run a firm will continue to produce as long as total revenue covers total variable costs or price per unit > or equal to average variable cost (AR = AVC). This is called the short-run shutdown price.
Why would a firm choose to shut down?A firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the variable costs of production. In that situation, the firm will experience a higher loss when it produces, compared to not producing at all.
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