In the long run, a firm must shut down if its average revenue is?

A. greater than average cost
B. less than average variable cost
C. equal to the minimum average cost
D. equal to the average cost

Correct Answer: Option B

B. less than average variable cost

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.

Technically, shutdown occurs if average revenue is below average variable cost at the profit-maximizing positive level of output.