Question

In the short run, if a purely competitive firm is producing Q where $Price = $Marginal Cost and simultaneously $Price = $Minimum Average Variable Cost, then explain why this firm is operating at output level known as the “Shutdown Point”.

Answer 1

In the short run, the perfectly competitive firm only produces when the price is greater than the minimum average variable cost because it would like to cover the costs to run its business smoothly.

The minimum average variable cost is also known as the shutdown point because at this price level, the firm will either shut down or continue to produce since it would be able to cover its variable costs but below this price level, the firm will definitely shut down in order to minimize its losses, therefore, the minimum average variable cost price level is also known as the shutdown point.