ECONOMICS
PROFIT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Yes, I understand this from the notes
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No, I don’t understand this from the notes
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No, I don’t understand this, as I have not read the notes
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None of the above
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Detailed explanation-1: -If total revenue were less than total variable cost, the firm’s economic loss would exceed total fixed cost. So the firm would shut down temporarily. Total fixed cost is the largest economic loss that the firm will incur. The firm’s economic loss equals total fixed cost when price equals average variable cost.
Detailed explanation-2: -A firm will shut down temporarily if the revenue it would get from producing is less than the variable costs of production. This occurs if price is less than average variable cost.
Detailed explanation-3: -When a perfectly competitive firm faces a price lower than the average variable cost in the short run, it will shut down its production and decide not to incur further losses because the revenue generated is not sufficient even to meet the per-unit cost of the quantity produced.
Detailed explanation-4: -Therefore, if price is less than the average variable cost then the firm should shutdown. Was this answer helpful?