Figure 14-1Suppose that a firm in a competitive market has the followingcost curves:Price13 +1211+10MC9ATC8AVC63645-4321123459 10 11QuantityRefer to Figure 14-1. The firm should shut down if the marketprice isabove $8.above $6.30 but less than $8.above $4.50 but less than $6.30.less than $4.50.

The shutdown point defines a price level below which it becomes absolutely inefficient for a firm to continue its operations in the short run and hence, the only feasible option left with the productive entity is to shut down operations with immediate effect. In a competitive market, the shutdown level is achieved at the intersection of the marginal cost curve and the average variable cost curve since the price in such a market is equal to the marginal cost of production in the short run.If the price reduces to a level below the intersection of the marginal cost curve and the average variable cost curve, the production of every additional unit of output contributes to accruing losses as even the cost incurred in variable factors doesn't get recovered from the marginal revenue earned. In such a case, it becomes infeasible for a firm to continue its operations for there is no incentive to do so. If the price is above the intersection of the average variable cost curve and marginal cost curve but below the intersection of the average total cost curve and marginal cost curve, it means that the firm is incurring losses only by not being able to recover the cost it incurred on fixed factors. Such a loss remains static and there lies an incentive for the firm to continue its operations in the short run since fixed costs can be recovered later. But if the price drops to a level below the shutdown should n point, it only means that the procurement of variable factors is amounting to greater losses.As evident from the figure above, the shutdown point is achieved at the intersection of the marginal cost curve and the average variable cost curve i.e. $4.50. Therefore, the firm should shut down if the market price is less than $4.50.

Answered: Refer to Figure 14-1. The firm should…

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Refer to Figure 14-1. The firm should shut down if the market price is above $8. above $6.30 but less than $8. above $4.50 but less than $6.30. less than $4.50.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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