Question

Which of the following represents the firm's short-run condition for shutting down?

1) Shut down if p < atc
2) Shut down if tr < fc
3) Shut down if tr < tc
4) Shut down if tr < vc

Answer 1

In the short-run, a firm will shut down if the total revenue is less than the variable costs.

Step-by-step explanation:

In the short-run, a firm will shut down if the price (p) is less than the average total cost (ATC). This means that the firm is unable to cover all of its costs, including both fixed and variable costs, with the revenue it receives from selling its output.

Option 1) Shut down if p < atc is incorrect because it compares the price to the average total cost, not the average variable cost (AVC).

Option 2) Shut down if tr < fc is incorrect because it does not consider the variable costs.

Option 3) Shut down if tr < tc is incorrect because it considers the total costs, not just the variable costs.

Option 4) Shut down if tr < vc is the correct option because it compares the total revenue (TR) to the variable costs (VC). If the total revenue is less than the variable costs, the firm would shut down in order to minimize its losses.