What is the shut-down price for a firm?

The shut-down price for a firm is the minimum average variable cost. This concept is crucial in understanding a firm's behavior in the short run. If the market price falls below the minimum average variable cost, the firm cannot cover its variable costs, meaning it would incur greater losses by continuing to operate than it would if it shut down production. In such a case, shutting down allows the firm to avoid variable costs while only incurring fixed costs, which are unavoidable in the short run.

At the shut-down price, the firm may still be able to cover its total costs associated with production in the long run, but in the short run, the focus is on the variable costs since fixed costs don't change with the level of output. It’s essential for firms to assess their operational decisions based on this threshold to minimize losses effectively.

Other options, such as the maximum average total cost or the fixed cost of production, do not accurately represent the threshold at which a firm decides to cease operations in the short run. The price at which total revenue equals total cost relates to breakeven points rather than shutdown criteria. Thus, minimum average variable cost accurately defines the shut-down price.