Question

Question Completion Status: MC ATC AVC 100 150 200 Figure 9.3 Figure 9.3 shows the cost structure of a firm in a perfectly competitive market. The price at which the firm is just as well off either operating or shutting down is: O $3. $4.50. O $6. $10.

Answer 1

Since the profit maximising condition of the perfectly competitive firm is

P=MC

Since the shut-down condition is

Price = minimum of AVC

So if price is less than the AVC, then it means firm is not able to cover even its variable cost.

So at price $4.5 firm is indifferent whether to shut-down or continue to operate because at this price firm is able to cover its fixed cost fully. It means firm at this price is just as well off either shut-down or operating.

Hence option second is the correct answer.