Answered: What is the shutdown decision of the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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What is the shutdown decision of the firm? How should a firm decide whether to continue business or shut down in the short run?

Expert Solution

Step 1

For a perfectly competitive company, where the total revenue of the company, i.e. the product of its price and quantity, is more than the average variable cost and less than the average total cost, the company is faced with a loss in the market and can continue to decide to close or to continue on a long-run basis.

But if the overall income of the business is less than the average variable cost, the very cost of production on the market will be lost and thus production will be stopped, i.e. shut down.

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