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In the short run a competitive firm will choose to shut down rather than continue production when the market price falls below:
AMarginal cost at every output
BMinimum average total cost
CMinimum average variable cost
DAverage fixed cost
Answer & Solution
Correct answer: C. Minimum average variable cost
1. Fixed costs are already incurred in the short run and cannot be avoided.
2. If price covers AVC and part of fixed cost, the firm continues to recover some fixed cost.
3. If price cannot even cover AVC, producing only adds to losses, so the firm shuts down.
4. The shutdown threshold is therefore the minimum point of AVC, not ATC.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.5_
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