Paper 3 · Market Structures
In the short run, at what point does a perfectly competitive firm choose to shut down production rather than continue operating?
AWhen price falls below average fixed cost, so the firm cannot recover its overheads.
BWhen price equals average total cost, so the firm earns exactly zero economic profit after covering every explicit and implicit cost of production.
CWhen marginal cost exceeds marginal revenue at every possible level of output.
DWhen price falls below average variable cost, so operating would fail to cover even variable costs.
Explanation: A firm should keep producing in the short run as long as price covers average variable cost, because any excess over AVC contributes towards fixed costs that must be paid regardless. Once price falls below AVC, producing loses more money than shutting down and paying only the fixed costs, so that is the shutdown point, distinct from the normal-profit point where price equals average total cost.
Derived from ZIMSEC Economics Paper 3, November 2004, Q4
