Final answer:
A firm will shut down in the short run if the market price at the profit-maximizing quantity is below the minimum average variable cost, as it cannot cover its variable costs, leading to larger losses if it continues to operate. The correct option is D.
Step-by-step explanation:
A firm will shut down in the short run at the profit-maximizing quantity if the market price is below the shutdown point, which is determined by the price at which the firm is able to cover its average variable cost (AVC). If a perfectly competitive firm's market price is less than its minimum AVC, it should cease production immediately to minimize losses.
In this case, staying open would not only cause the firm to lose out on covering its variable costs, but would also add additional losses from fixed costs. On the contrary, if the market price is greater than AVC, the firm should keep operating in the short run even if doing so results in losses, as these losses are smaller than what would be incurred from shutting down and losing all fixed costs.
In summary, a firm will shut down in the short run if at the profit-maximizing quantity, the market price is below the minimum average variable cost.