Under perfect competition, the short run shut down point of a firm is the minimum point of its AVC curve. At this point, what is the relation between SMC and AVC?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → SMC is equal to AVC, as the SMC curve cuts the AVC curve here
The SMC curve cuts the AVC curve from below at the minimum point of AVC. So at the short run shut down point, SMC = AVC.
Option (1) SMC is equal to SAC, as the SMC curve cuts the SAC curve here — Incorrect. SMC meets SAC at the minimum of SAC, which lies to the right of the minimum of AVC.
Option (2) SMC is less than AVC, as AVC is still falling — Incorrect. SMC is below AVC only while AVC is still falling, to the left of its minimum.
Option (3) SMC is greater than AVC, as AVC has started rising — Incorrect. SMC is above AVC only once AVC has started rising, to the right of its minimum.
Option (4) SMC is equal to AVC, as the SMC curve cuts the AVC curve here — Correct. At the lowest point of AVC, the SMC curve passes through it.
This question uses Production and Costs and The Theory of the Firm under Perfect Competition together.
NCERT (2026-27): “Shapes of the Short Run Cost Curves … Now, what does the AVC curve look like? For the first unit of output, it is easy to check that SMC and AVC are the same. So both SMC and AVC curves start from the same point. Then, as output increases, SMC falls. AVC being the average of marginal costs, also falls, but falls less than SMC. Then, after a point, SMC starts rising. AVC, however, continues to fall as long as the value of SMC remains less than the prevailing value of AVC. Once the SMC has risen sufficiently, its value becomes greater than the value of AVC. The AVC then starts rising. The AVC curve is therefore ‘U’-shaped. As long as AVC is falling, SMC must be less than the AVC. As AVC rises, SMC must be greater than the AVC. So the SMC curve cuts the AVC curve from below at the minimum point of AVC.” Introductory Microeconomics - Chapter 4, The Theory of the Firm under Perfect Competition: “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. …” |