Question

Initially, the market price is p=15​, and the competitive​ firm's average variable cost is 19​, while its average cost is 22.

Should it shut​ down? ​ Why?
This firm should
A. not shut down because average fixed cost is less than the market price.
B. not shut down because average cost is greater than average variable cost.
C. shut down because average cost is greater than the market price.
D. shut down because average fixed cost is less than the market price.
E. shut down because average variable cost is greater than the market price.

Answer 1

Answer: E. shut down because average variable cost is greater than the market price.

Step-by-step explanation:

A company should shutdown temporarily if it find that its average revenue which in this case is also its market price (this is a competitive firm), is enough to cover only its variable cost as shutting down will eliminate the variable costs.

In this case however the average revenue is not even enough to cover its average variable cost so they should definitely shutdown.