Which of the following is correct about shutdown point?
a) 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. This point is called the short run shut down point of the firm
b) The shut down point is the minimum of LRAC curve in the long run.
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: Both a and b are true
While deriving the supply curve 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.