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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 36 Shutting Down to Minimize Loss TABLE 9.3 A Firm Will Shut Down If Total Revenue Is Less Than Total Variable Cost CASE 1: SHUT DOWN CASE 2: OPERATE AT PRICE = 1.50 Total Revenue q = 0 Total revenue 1.50 x 800 1,200 Fixed costs Variable costs Total costs + 2,000 2,000 Fixed costs Variable costs Total costs + 2,000 1,600 3,600 Profitloss TR TC: 2,000 Operating profitloss TR TVC 400 Total profitloss TR TC 2,400 Any time that price average revenue is below the minimum point on the average variable cost curve, total revenue will be less than total variable cost, and operating profit will be negative —that is, there will be a loss on operation. In other words, when price is below all points on the average variable cost curve, the firm will suffer operating losses at any possible output level the firm could choose. When this is the case, the firm will stop producing and bear losses equal to fixed costs. This is why the bottom of the average variable cost curve is called the shut-down point. At all prices above it, the marginal cost curve shows the profit- maximizing level of output. At all prices below it, optimal short-run output is zero. CH APTER

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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 36 The short-run supply curve of a competitive firm is that portion of its marginal cost curve that lies above its average variable cost curve Figure 9.3. shut-down point The lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs. CH APTER

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g -Ru n Co sts an d Out put Decisi on s © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 12 of 36 FIGURE 9.3 Short-Run Supply Curve of a Perfectly Competitive Firm CH APTER

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