Question

Margot sells cardigans for $75 in a perfectly competitive market, and she has been incurring losses. At what minimum average variable cost should she immediately shut down?

a.) $75

b.) $75.01

c.) $74.99

d.) Minimum AVC should have no bearing on her shutting down

Answer 1

If a firm operates in a perfectly competitive market then it will remain in operation untill price is greater than the minimum average variable cost.

If price becomes equal to minimum average variable cost then firm would be indifferent between continuing operating or shutting down.

However, if price becomes less than minimum average variable cost then firm will immediately shut down as shutting down will enable it to minimize its losses.

In given case, market price is $75 per cardigan.

So, if price becomes less than the minimum average variable cost then firm will immediately shut down.

So, if minimum average variable cost is $75.01 then it will be greater than the price and thus firm should immediately shut down.

Thus, she should immediately shut down if minimum average variable cost is $75.01.

Hence, the correct answer is the option (b).