Question

Why and when would a firm producing in the short-run choose to shut-down. Show graphically with explanation.

Answer 1

The firm's shut down point is where AVC ( average variable cost) equals MC ( marginal Cost).

Remember a firm can operate below the break even point i.e where the firm is experiencing losses but is able to earn a reveue greater than its fixed costs

Firms can operate even when its making losses till the point it is earning over the fixed costs, below whih the business beomes unststainable as it beomes difficut to gauge whether increasin output will even make profits for the firm coresponding to the market price.

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