UGC NET COMMERCE June 2019 Q2
- Option : B
- Explanation : A firm generating an economic loss faces a tough choice: Should it continue to produce or should it shut down its operation? To make this decision, we need to add another variable to our discussion of economic profits and losses: average variable cost, Variable costs are costs that vary with output—for example, wages, raw material, transportation, and electricity. If a firm cannot generate enough revenues to cover its variable costs, it will have larger losses if it operates than if it shuts down (when losses are equal to fixed costs). That is, the firm will shut down if its total revenue (p × q) is less than its variable costs (VC). If we divide p × q by q, we get p, and if we divide VC by q we get AVC, so if p < AVC, a profit-maximizing firm will shut down. Thus, a firm will not produce at all unless the price is greater than its average variable cost.
