Final answer:
The correct answer is a. A profit-maximizing firm will shut down in the short run when its total revenue is less than its total variable costs because it minimizes losses by not incurring additional variable costs that cannot be covered by revenue.
Step-by-step explanation:
A profit-maximizing firm will shut down when its total revenue is less than its total variable cost. This economic concept is closely associated with the decision-making process of firms, especially in perfect competition. A shutdown point is a level of production where the price of the good is equal to the average variable cost (AVC) of production, and it is the intersection of the average variable cost curve and the marginal cost curve.
If a firm's market price falls below this point, continuing operations would lead to greater losses than shutting down temporarily. That's because operating would incur both fixed and additional variable costs without enough revenue to cover even the variable costs. On the other hand, if a firm shuts down, it would only lose out on the fixed costs. Consequently, when the price falls below AVC, the firm will shut down, as it will incur smaller losses compared to if it stayed in operation.
It's important to note that this only considers the short run; in the long run, other factors may influence the firm's decision to exit the market entirely.