Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 14 - Part V - Firms in Competitive Markets - Questions for Review: 4

Answer

A firm will shut down in the short run if the average variable cost is greater than average revenue.

Work Step by Step

In the short run, fixed costs are sunk costs. So as long as a firm can cover its variable costs, it should continue operating. But if the firm cannot cover its variable costs, it will lose more money by operating than by shutting down, so it will shut down.
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