At which stage of production should a firm shut down? When?

A. AVC=ATC
B. AVC
C. AVC>price
D. AVC=MC

Correct Answer: Option C

C. AVC>price

Explanation

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.

As long as the price is above average variable costs, the firm should stay in business to minimize its losses in the short run.