Final answer:
The average variable cost curve helps a firm determine if it should shut down immediately by identifying the shutdown point, where continuing operations would lead to losses.
Step-by-step explanation:
The average variable cost curve is a tool used by firms to determine the price at which they should continue producing in the short run.
By identifying where the price intersects with the average variable cost curve, a firm can identify profits and losses and make strategic decisions about whether to shut down immediately or continue operations.
The shutdown point is where the price equals the average variable cost, and if the market price falls below this point, the firm is better off shutting down in the short run to minimize losses.
By comparing total revenue and total cost, a firm can calculate profits or identify periods of loss. If total revenue is less than variable costs, the firm is not covering its variable costs and should consider shutting down.
Thus, by analyzing the average cost curve, a firm can understand its cost structure and make informed decisions about its short-term operational status.