Shut down price (micro)

Question 1

What is the shut down price?

Answer 1

The minimum price a business needs to justify remaining in the market in the short run.

Question 2

How much profit does a business need to make in the Long run to justify remaining in an industry?

Answer 2

At least Normal profit

Question 3

What point will a firm continue to produce in an industry in the Short run?

Answer 3

As long as total revenue covers total variable costs

price per unit>or equal to average variable cost (AR=AVC)

Question 4

Give an example when a firm will continue to produce even if AR<AVC

Answer 4

• If there is a temporary fall in demand due to a recession, a firm may prefer to keep producing - so they don’t lose long term customers.
• They may just cut costs and increase prices

Question 5

How can access to credit (loan) or high savings affect a firm running at AR<AVC

Answer 5

It can afford to run operating at a loss for a short amount of time.

Question 6

When might a firm shut down if price>AVC?

Answer 6

When the firm may be pessimistic about the growth of this particular market and feel there is a high opportunity cost to staying in a declining industry.

Question 7

What can prolong a firms decision to shut down?

Answer 7

In the real world, it may take time for a firm to realise they are making an operating loss.