Final answer:
The statement that lowering the price will reduce the firm's break-even point is false. Lowering the price actually requires the firm to sell more units to reach break-even because revenue per unit has decreased. The decision to continue production or to shut down depends on whether the price covers the average variable cost and minimizes losses.
Step-by-step explanation:
The statement 'A lower price for the firm's product will reduce the firm's break-even point' is false. The break-even point is the level of sales at which total revenues equal total costs, resulting in no profit or loss. Lowering the price of a product will not reduce the break-even point; instead, it may increase the number of units that need to be sold to reach break-even due to the decrease in revenue per unit.
According to Figure 8.6, if a firm is operating below the break-even point—where price equals average cost—the firm is making losses. However, if the firm's price covers the average variable cost but is below the average total cost, the firm faces a choice to either continue producing to minimize losses or to shut down. The preferable option is the one that incurs the least losses.
In the upper zone, where the price is above where marginal cost (MC) crosses average cost (AC), the firm makes a profit. At the break-even point, where MC crosses AC, the firm earns zero profits. And between the break-even point and the shutdown point, where MC crosses average variable cost (AVC), the firm covers its variable costs despite operating at a loss.