The short-run shutdown price

In the short run the firm owes its fixed cost whether it produces or not. So the question is whether producing at least covers the variable cost. If price is at or above average variable cost, every unit pays for its own variable cost and leaves something toward fixed cost, so producing loses less than closing. If price drops below average variable cost, each unit made adds to the loss, and the firm does better to shut down and lose only its fixed cost.

The cutoff is the lowest point on the AVC curve. On the diagram, marginal cost crosses AVC at its minimum, at the height of D. So the firm stops producing in the short run when price falls below 0D.

Each choice

• A. At 0A the firm earns economic profit, so it has every reason to keep producing. This is far above any shutdown point.
• B. Price 0B is above the lowest ATC, so the firm still earns some profit there. Nothing about this price signals a shutdown.
• C. 0C is the lowest point of ATC, the break-even price. Below it the firm loses money, but it should keep producing while price still covers average variable cost. Mixing up break-even and shutdown leads here.
• D (correct). The minimum of AVC is the short-run shutdown point: below it, producing loses more than closing.
• E. 0E is the lowest point of the marginal cost curve, not of AVC. At prices between E and D the firm would not even cover its variable cost on the units it makes.