Question

A firm will shut-down its operation if its _____________.

• A. revenue is just equal to variable cost and the loss is equal to fixed costs.
• B. earning covers variable costs as well as part of the fixed costs.
• C. average revenue falls below average variable cost.
• D. firms, in the short-run never shut down their operation.

Answer 1

Answer: (C)

average revenue falls below average variable cost.

In a competitive market, the firm maximize it's profit when the average revenue of the firm is equal to average variable cost of the firm so that the firm earns normal profits in the long run. Therefore, if the average revenue is less than the average variable cost then the firm should shutdown