The figure shows the short run marginal cost (SMC), average variable cost (AVC) and short run average cost (SAC) curves of a firm under perfect competition.
Which labelled points are the firm’s short run shut down point and its short run break-even point, respectively?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 1 and 2
The short run shut down point is the minimum of AVC, where SMC cuts AVC: point 1. The short run break-even point is the minimum of SAC, where SMC cuts SAC: point 2.
Point 3 is on the falling part of SMC, where a profit-maximising firm never produces. Point 4 is just a point on the rising SMC, above both minimum points.
At the shut down point the price covers only AVC; at the break-even point it covers SAC, so the firm earns only normal profit.
NCERT (2026-27): “4.4.3 The Shut Down Point Previously, while deriving the supply curve, we have discussed that in the short run the firm continues to produce as long as the price remains greater than or equal to the minimum of AVC. Therefore, along the supply curve as we move down, the last price-output combination at which the firm produces positive output is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this, there will be no production. This point is called the short run shut down point of the firm. …” “4.4.4 The Normal Profit and Break-even Point … The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” |