A profit-maximizing monopolist finds that if it remains open, the best output is 50 a week, but at this output it would make a loss. Under what circumstances should it shut down?

Solution

Statement b is correct. If AR is less than AVC, then each unit of output has a revenue below its variable cost. In turn, total revenue is less than total variable cost, so the firm's loss would equal the gap between its total revenue and its total variable cost plus its total fixed cost. If the firm instead shut down and produced nothing, it would have a zero total revenue, and it would buy no variable inputs and so have a zero total variable cost. So its loss would only equal its total fixed cost.