Answer to Question #295601 in Microeconomics for Himanshu

Question

Q2. Explain in detail the shutdown and exit conditions for a perfectly competitive firm.

Answer 1

The shutdown of perfectly competitive firm occurs in two forms; for a one-product firm, the shutdown point occurs whenever the marginal revenue drops below marginal variable costs. For a multi-product firm, shutdown occurs when ordinary marginal revenue drops below average variable costs. Therefore, if the market price that a perfectly competitive firm faces is above average variable cost, but below average cost, then the firm should continue producing in the short run, but exit in the long run. The point where the marginal cost curve crosses the average variable cost curve is known as the shutdown point.