Question

A firm will shut down production in the short run if ________.    (A) total revenues...

A firm will shut down production in the short run if ________.

  

(A) total revenues do not cover variable costs

   

(B) marginal cost equals average cost

   

(C) total revenues do not cover fixed costs

   

(D) marginal revenue equals marginal cost

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Answer #1

A firm will shut down production in the short run if ________.

Answer –

(A) Total revenues do not cover variable costs

At the profit maximizing level of output (MR=MC), if the total revenue is not able to recover the total variable cost, then the firm should shut down in the short run.

It otherwise means that at the profit maximizing level of output the average variable cost curve should be below the average revenue curve indicating the firm’s total revenue is recovering the variable cost and firm should continue to produce.

If the average variable cost curve is above the average revenue curve which means that the total revenue is not recovering the variable cost, then the firm should shut down.

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