Question

When a perfectly competitive firm decides to shut down, Group of answer choices marginal cost is above average variable cost.

Answer 1

price is below average variable cost

Step-by-step explanation:

A perfect competition is characterized by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.

In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.

firms should shutdown when price is less than average variable cost and exit when price is less than average total cost