Question

The firm should shut down if the market price is:___________.

A. above $8.
B. above $6.30 but less than $8.
C. above $4.50 but less than $6.30.
D. less than $4.50.

Answer 1

Answer: D. less than $4.50.

Step-by-step explanation:

In the short run, a business should shutdown if the market price is below the Average Variable costs as because at this point, only losses are being made if the company stays in action.

If price is below the variable cost, it is best to shutdown so that the company can stop incurring the variable costs and incur the fixed cost alone. The lowest Average Variable cost is $4.50 for this good and so if the price falls below $4.50, the should shutdown.