Question

How does the average variable cost curve help a firm know whether it should shut down immediately?

a. It intersects the average total cost curve at the shutdown point
b. When it is above the average fixed cost curve, the firm should shut down
c. It is always below the average total cost curve at every level of output
d. When it is above the average total cost curve, the firm should shut down

Answer 1

The average variable cost curve shows a firm the shutdown point, suggesting that if the market price is below the minimum average variable cost, the firm should shut down to minimize losses.

Step-by-step explanation:

The average variable cost curve helps a firm decide whether to shut down immediately by indicating the shutdown point. This point is where the average variable cost curve intersects with the marginal cost curve. If a firm faces a market price that is below the minimum average variable cost, it is not covering its variable costs, and thus operating is resulting in larger losses. In this scenario, the firm should shut down immediately to avoid increasing its losses. Conversely, if the market price is above the minimum average variable cost but below the average total cost, the firm should continue operating in the short run but consider exiting in the long run.