A firm will shut down in the short run if ______.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Price < Average Variable Cost.
In the short run, a firm has to pay its fixed cost even if it produces nothing. So it compares the price with its average variable cost (AVC), the variable cost per unit. At every price below the minimum AVC, the firm’s output is zero.
Option (1) Price < Average Variable Cost. — Correct. The price does not even cover the variable cost of each unit. Every unit produced adds to the loss, so the firm stops.
Option (2) Price < Average Fixed Cost. — Incorrect. Average fixed cost is the fixed cost per unit. Fixed cost has to be paid either way, so it does not decide whether the firm produces.
Option (3) Total Revenue > Total Cost. — Incorrect. Here the firm earns more than its total cost, so it has every reason to go on producing.
Option (4) Price = Average Cost. — Incorrect. The firm covers all its costs and earns normal profit. This is the break-even point, well above the point where it stops.
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. In the long run, however, the shut down point is the minimum of LRAC curve. 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.…” |