If a competitive firm finds that it maximises short-run profits by shutting down, which of the following must be true?Group of answer choicesp < AVC for all levels of output.p < AVC only for the level of output at which p = MC.p < AVC only if the firm has no fixed costs.The firm will earn zero profit.
Question
If a competitive firm finds that it maximises short-run profits by shutting down, which of the following must be true?Group of answer choicesp < AVC for all levels of output.p < AVC only for the level of output at which p = MC.p < AVC only if the firm has no fixed costs.The firm will earn zero profit.
Solution
If a competitive firm finds that it maximises short-run profits by shutting down, then it must be true that p < AVC for all levels of output.
Here's why:
In the short run, a firm will decide to produce if the price (p) is greater than the average variable cost (AVC). If the price is less than the AVC, the firm would not cover its variable costs of production and would therefore be better off shutting down.
So, if a firm maximises its short-run profits by shutting down, it means that the price it would receive for its product is less than the average variable cost of producing it, at all levels of output.
The other options are not necessarily true. The price being less than the AVC only for the level of output at which p = MC, or only if the firm has no fixed costs, are specific scenarios that may not always apply. And the firm shutting down does not necessarily mean it will earn zero profit; it could still be making a loss.
Similar Questions
Multiple Choice QuestionIf a monopolistically competitive firm is producing where its marginal revenue is less than its marginal cost, then the firmMultiple choice question.is maximizing profits.should produce more output to increase profits.should shut down in the short run.should produce less output to increase profits or reduce losses.should shut down in the long run.
The short-run marginal and average variable cost curves for a competitive firm are given by MC = 2+2q and AVC = 2+q. The profit-maximizing level of output for a firm is 4 and its total fixed cost is $18. Which of the following must be true about the firm? Group of answer choices The firm is charging a price of $4 and covering its average variable cost, hence it should continue operating in the short-run. The firm is charging $10 and will remain in the industry in the short-run; but it is not covering its total costs and will consider leaving the industry in the long run. The firm is charging a price of $4 and making a short-run loss, hence it should shut down immediately. The firm is charging a price of $10 and making a zero profit, hence it should shut down eventually. The firm is charging a price of $10 and making a positive profit, hence it will remain in the industry in the long-run.
A firm operates in a perfectly competitive market. The firm’s total cost of production is given by the following equation: TC(q) = 100 + 33q2 + 5q, where q is the quantity supplied. What is the shutdown point for this firm in the short run, or in other words, what is the market price below which a firm is better off not supplying any units in the short run? [Advice: draw AVC and MC]
In the short run,Group of answer choicesall firms that earn a loss will shut down.if current firms are earning a profit, new firms will enter the industry.firms act to minimize losses or maximize profits.All of these are correct.
Economic profits in a short-run equilibriumQuestion 1Select one:a.are never negative because a firm would shutdown if profits are negative.b.may be positive, zero, or negative.c.will never exceed the difference between marginal revenue and marginal cost per unit of output.d.are always zero.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.