Discussion
A perfectly competitive firm would shut down if:
Answer: B
A perfectly competitive firm in the short run covers its variable cost if the price (equal to average revenue) is at least the average variable cost. When AVC is greater than AR, the revenue does not even cover the variable cost, so each unit produced adds to the loss and the firm is better off shutting down, where it loses only its fixed cost. If AVC is less than AR the firm continues to produce. AVC = MC marks the minimum of the AVC curve, which is the shut down price, and AVC less than MC alone does not decide the matter. The answer is AVC greater than AR, option B.
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