Authors libby rittenberg 488

the one at which marginal cost equals marginal revenue would produce even greater losses Suppose Mr Gortari were to shut down and produce no radishes Ceasing production would reduce variable costs to zero, but he would still face fixed costs of $400 per month (recall that $400 was the vertical intercept of the total cost curve in Figure 9.6 "Total Revenue, Total Cost, and Economic Profit") By shutting down, Mr Gortari would lose $400 per month By continuing to produce, he loses only $222.20 Mr Gortari is better off producing where marginal cost equals marginal revenue because at that output price exceeds average variable cost Average variable cost is $0.14 per pound, so by continuing to produce he covers his variable costs, with $0.04 per pound left over to apply to fixed costs Whenever price is greater than average variable cost, the firm maximizes economic profit (or minimizes economic loss) by producing the output level at which marginal revenue and marginal cost curves intersect Shutting Down to Minimize Economic Loss Suppose price drops below a firm’s average variable cost Now the best strategy for the firm is to shut down, reducing its output to zero The minimum level of average variable cost, which occurs at the intersection of the marginal cost curve and the average variable cost curve, is called theshutdown point Any price below the minimum value of average variable cost will cause the firm to shut down If the firm were to continue producing, not only would it lose its fixed costs, but it would also face an additional loss by not covering its variable costs Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 488