Question

A firm will shut down its operation temporarily if

It is not making an economic profit.

Marginal cost exceeds marginal revenue

The price is equal to average total cost

It is not making a normal profit

It is unable to cover its variable costs.

Answer 1

A firm generally decides to shut down its operation on temporary basis when the price at which it sells its output becomes less than the average variable cost of output it produces.

When price becomes less than AVC then in that case firm is not able to recover its variable cost in full manner and its loss becomes equal to unrecovered fixed cost plus unrecovered variable cost.

Since, variable cost is incurred only when output is produced, shut down enable firm to minimize the loss as loss equal to unrecovered variable cost gets eliminated with shut down.

So,

A firm will shut down its operation temporarily if it is unable to cover its variable cost.

Hence, the correct answer is the option (5) [it is unable to cover its variable cost].