Answer to Question #94584 in Macroeconomics for bhere101

Question

In the short run,when should a firm continue with production according to shut down rule?

Answer 1

A firm will choose to implement a shutdown of production when the revenue received from the sale of the goods or services produced cannot even cover the variable costs of production. In that situation, the firm will experience a higher loss when it produces, compared to not producing at all.

Technically, shutdown occurs if average revenue is below average variable cost at the profit-maximizing positive level of output. Producing anything would not generate enough revenue to offset the associated variable costs; producing some output would add further costs in excess of revenues to the costs inevitably being incurred (the fixed costs). By not producing, the firm loses only the fixed costs.