Answer to Question #235584 in Microeconomics for Moza

Question

What is shut down condition of a firm? Derive the shut down condition mathematically
and show graphically with explanation.

Answer 1

(a) 

The firm decides to shut down when $P=AVC$ that is, the price line just touches the average variable cost. However, the firm actually shuts down when $P<AVC$  that is, the price line is below average variable cost of the firm.

(b) 

Loss can be calculated as $π=TR−TC$

Here $Loss=EX−CX=CE$

If OX is the total unit produced then the shaded area will give the total loss incurred by firm.

Shaded Region$= Total \space Loss =CE×OX$

shutdown Point of firm

Here X is the equilibrium quantity of the firm