Question

When the price is less than the average variable cost, the firm should _________.

• A. continue to operate till the market recover
• B. shut down its operation for the time being
• C. retrench workers and pay them compensation
• D. clear the existing stock at a price less than the prevailing price to beat the competitors

Answer 1

Answer: (B)

shut down its operation for the time being

In short run market condition, there are two types of cost incurred by a firm; Fixed cost which does not depend on the production of output and variable cost which depends upon the production of output.

There if the price is equal to average variable cost then the firm would incur losses of fixed cost which the firm would anyway incurred if they chose not to produce anything.

But if the firm is recurring losses for variable cost where price is less than average variable cost then the firm must shut down in order to avoid such losses.