The firm shuts down if total revenue is less than variable cost By dividing

The firm shuts down if total revenue is less than

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The firm shuts down if total revenue is less than variable cost. By dividing both sides of this inequality by the quantity  Q we can write it as Shut down if TR/Q < VC/Q . The left side of the inequality,  TR/Q , is total revenue  P ×   Q  divided by quantity  Q , which is average revenue, most simply  expressed as the good's price,  P . The right side of the inequality,  VC/Q , is average variable cost,  AVC . Therefore, the firm's  shutdown criterion can be restated as Shut down if P < AVC . That is, a firm chooses to shut down if the price of the good is less than the average  variable cost of production. This criterion is intuitive: When choosing to produce, the  firm compares the price it receives for the typical unit to the average variable cost that  it must incur to produce the typical unit. If the price doesn't cover the average variable  cost, the firm is better off stopping production altogether. The firm still loses money  (because it has to pay fixed costs), but it would lose even more money by staying  open. The firm can reopen in the future if conditions change so that price exceeds  average variable cost. We now have a full description of a competitive firm's profit-maximizing strategy. If  the firm produces anything, it produces the quantity at which marginal cost equals the  price of the good. Yet if the price is less than average variable cost at that quantity, the  firm is better off shutting down and not producing anything. These results are  illustrated in  Figure 3 The competitive firm's short-run supply curve is the portion of its 
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marginal-cost curve that lies above average variable cost . 14-2d Spilt Milk And Other Sunk Costs Sometime in your life you may have been told, “Don't cry over spilt milk,” or “Let  bygones be bygones.” These adages hold a deep truth about rational decision making.  Economists say that a cost is a  sunk cost  when it has already been committed and  cannot be recovered. Because nothing can be done about sunk costs, you can ignore  them when making decisions about various aspects of life, including business strategy. Our analysis of the firm's shutdown decision is one example of the irrelevance of sunk  costs. We assume that the firm cannot recover its fixed costs by temporarily stopping  production. That is, regardless of the quantity of output supplied (even if it is zero),  the firm still has to pay its fixed costs. As a result, the fixed costs are sunk in the short  run, and the firm can ignore them when deciding how much to produce. The firm's  short-run supply curve is the part of the marginal-cost curve that lies above average  variable cost, and the size of the fixed cost does not matter for this supply decision.
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