Short-Run Shutdown Decision Practice Quiz (AP Microeconomics)

📚 Topic Summary

The short-run shutdown decision is a crucial concept in microeconomics. A firm will temporarily cease production if its total revenue (TR) is less than its total variable costs (TVC). In other words, if the price (P) is less than the average variable cost (AVC), the firm should shut down in the short run to minimize losses. This doesn't mean the firm goes out of business permanently; it simply pauses production until market conditions improve. The firm will still incur fixed costs (FC) even when shut down.

Firms operate where Marginal Revenue (MR) equals Marginal Cost (MC). We must determine if shutting down minimizes losses if Average Revenue (AR) is lower than Average Total Cost (ATC). If Average Revenue (AR) is greater than Average Variable Cost (AVC), the firm should continue operating.

🧠 Part A: Vocabulary

Match the terms with their definitions:

1. Average Variable Cost (AVC)
2. Fixed Costs (FC)
3. Shutdown Point
4. Total Revenue (TR)
5. Marginal Cost (MC)

1. The additional cost of producing one more unit of output.
2. Costs that do not vary with the level of output.
3. The point where price equals minimum average variable cost.
4. Total income from the sale of products.
5. Variable costs divided by quantity.

(Match the definition to the term. e.g. 1 - a)

📊 Part B: Fill in the Blanks

A firm should shut down in the short run if its ___________ is less than its ___________. This means the ___________ is below the minimum ___________. Even when shut down, the firm still incurs ___________. If the firm continues to produce, it operates where _______ equals ______.

🤔 Part C: Critical Thinking

Explain a real-world scenario where a business might choose to shut down temporarily. What factors would they consider when making this decision?