Final answer:
A firm will shut down in the short run when the price is below average variable costs at all possible rates of output because this means it is not covering its variable costs and would incur larger losses by staying open.option a is correct answer.
Step-by-step explanation:
A firm will shut down in the short run when the market price it can achieve for its product is below average variable costs at all possible rates of output. This situation is described as the shutdown point. At and above the shutdown point, the firm can cover its average variable costs and some portion of its fixed costs, even if it is incurring losses.
However, if the price falls below the minimum average variable cost, the firm would be unable to cover its variable costs, and continuing production would result in larger losses than if it were to shut down and only incur fixed costs.
Therefore, the correct answer to your question is 'a. price is below average variable costs at all possible rates of output'. Firms make production and shutdown decisions based on whether they can cover their variable costs in the short run. If they can at least cover their variable costs, they may continue to produce despite making a loss because producing, in this case, means losing less money than shutting down, which would result in losing the entire amount of fixed costs.