Question

The minimum point of the average variable cost curve (AVC) is referred to as the a. Break-even price. b. Shut-down price. c. Government subsidy price. d. Profit maximizing point A firm will shut down its operation temporarily if a. It is not making an economic profit. b. Marginal cost exceeds marginal revenue c. The price is equal to average total cost d. It is not making a normal profit e. It is unable to cover its variable costs.

Answer 1

Ans. b. Shut- down price.

the shutdown price where P = min. AVC, if the price falls below the minimum of AVC then the firm will shut - down the production because the firm will not able to cover the variable cost of the production.

Break-even point where P = ATC, normal profit situation.

Government subsidy price is the price at which the goods and services sales at the reducing price and the cost of production that goods and services paid by the government.

Profit maximization situation where P = MR = MC

Ans.e. It is unable to cover its variable costs.

This is not the answer because if a firm is not making a profit still can produce something unless it covers the variable cost of the production and can bear the loss equal to the fixed cost.

This is not the answer because if Marginal cost exceeds the marginal revenue, at this level the firm is producing more and the firm will earn a higher economic profit if the production of the good decreases until it will reach to MR = MC.

this is not the answer as Price is equal to the average total cost is the break-even situation where the firm earns a normal profit.

this is not the answer because of firm will make a normal profit where the price is less than the average total cost but greater than the average variable cost as over this range firm will be able to cover up the portion of variable costs of the production along with the fixed cost of the production.

A firm will shut down temporarily when the price falls below the average variable costs because at this level the firm will not able to cover the variable cost of the production.