Shutdown Point Case (Average Variable Cost = Market Price < Average Total Cost)
If the market price in the above example = $162.46,
let's answer the following 3 questions:
(1) Should the firm produce? The firm should produce as long as the market price >= Average Variable Cost (AVC).
(2) If so, how much?
- Profit Maximizing Rule: A firm maximizes profit by continuing to produce and sell output until Marginal Revenue (MR) = Marginal Cost (MC).
- In pure competition, price = marginal revenue, so in purely competitive industries the rule can be restated as the firm should produce that output where P = MC, because P = MR.
(3) What will be the profit or loss? The profit (or loss) = [Market Price - ATC] * Output