Final answer:
The break-even point is where sales volume makes contribution margin equal to fixed expenses, resulting in zero profits. Operating above this point leads to profits, while falling below but above the shutdown point means the firm covers variable costs, thus minimizes losses. Below the shutdown point, the firm will close as it cannot sustain operations.
Step-by-step explanation:
The break-even point indicates the sales volume needed to make contribution margin equal to fixed expenses. At this point, a firm makes zero profits since all revenues go towards covering both the variable and fixed costs. If a firm's operating where the market price is at a level higher than the break-even point, it is earning profits because price is greater than average cost. Conversely, if the price is exactly at the break-even point, the firm is making zero profits.
When price falls between the shutdown point and the break-even point, a firm is making losses but may continue to operate as it can still cover its variable costs, essentially minimizing losses compared to a total shutdown. Lastly, a firm will shutdown immediately if the price falls below the shutdown point, because it fails to cover even the variable costs, leading to the firm not being able to operate sustainably.