In the Short Run, Why Would a Firm in a Perfectly

question 30

Multiple Choice

In the short run, why would a firm in a perfectly competitive market shut down production if the prevailing market price falls below the lowest possible average variable cost?

• A) At that point (economic) profit is zero.
• B) Below that point average revenue becomes less than marginal revenue.
• C) Below that point marginal revenue becomes insufficient to pay for avoidable average variable cost.
• D) Below that point other firms with similar cost will find it profitable to enter the market and take away demand from the existing firms.

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Definitions:

Break-Even Analysis

A financial calculation to determine the sales volume at which total revenues equal total costs, resulting in no profit or loss.

Fixed Costs

Expenses that do not vary with the level of production or sales, such as rent or salaries.

Variable Cost

Expenses that vary proportionally with the level of production or service output, such as materials or labor costs.

Capacity

The maximum amount of work or production an organization is capable of completing in a specified period.