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JAMB Economics 2006 Question 46

Question 46

Market Structures

A perfectly competitive firm is advised to close down when the

  1. A.price is below the marginal cost
  2. B.price is equal to the marginal revenue
  3. C.marginal revenue is equal to the marginal cost
  4. D.price is below the average variable cost
Show the answer and explanation

Answer: D (price is below the average variable cost)

Explanation

If price cannot even cover average variable cost, the firm loses less by shutting down and paying only its fixed costs.