Question

In the short run, shut down point is ________.

• A. the point of minimum AVC
• B. the point of minimum AVC where the SMC curve cuts the AVC curve
• C. the point of minimum SAC
• D. the point of minimum SAC where the SMC curve cuts the SAC curve

Answer 1

The correct option is B the point of minimum AVC where the SMC curve cuts the AVC curve

The shutdown condition is given by P $\le$ AVC. In the short run firms have at least one fixed factor, these need to be inured irrespective of production, thus if the firm is covering its average variable costs and making some contributions towards its fixed costs, it is profitable to stay in business. If the AVC is not covered then it makes sense to shutdown and limit the losses to the fixed costs.