Question on: JAMB Economics - 2024
In the long run, a firm must shut down if its average revenue is
A
greater than average cost
B
equal to the average cost
C
equal to the minimum average revenue is
D
less than average variable cost
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Correct Option: D
In the long run, a firm should shut down if it cannot cover its average variable costs. Here's why:
- Long-Run Considerations: All factors of production are variable in the long run. A firm must cover all costs to stay in business.
- Average Variable Cost (AVC): If the price (average revenue, AR) falls below the AVC, the firm does not cover its variable input costs.
- Shut-Down Point: When AR < AVC, the firm minimizes losses by shutting down, losing only fixed costs. Continuing operation leads to losses of both fixed and variable costs.
- Other Options:
- AR > AC: Firm makes a profit and should not shut down.
- AR = AC: Zero economic profit; may continue operation.
- AR = minimum average revenue: Not a clear shut-down condition.
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