Figure 9.9 "Shutting Down" shows a case where the price of radishes drops to $0.10 per pound Price is less than average variable cost, so Mr Gortari not only would lose his fixed cost but would also incur additional losses by producing Suppose, for example, he decided to operate where marginal cost equals marginal revenue, producing 1,700 pounds of radishes per month Average variable cost equals $0.14 per pound, so he would lose $0.04 on each pound he produces ($68) plus his fixed cost of $400 per month He would lose $468 per month If he shut down, he would lose only his fixed cost Because the price of $0.10 falls below his average variable cost, his best course would be to shut down Figure 9.9 Shutting Down The market price of radishes drops to $0.10 per pound, so MR3 is below Mr Gortari’sAVC Thus he would suffer a greater loss by continuing to operate than by shutting down Whenever price falls below average variable cost, the firm will shut down, reducing its production to zero Shutting down is not the same thing as going out of business A firm shuts down by closing its doors; it can reopen them whenever it expects to cover Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 489