CFA Practice Question

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CFA Practice Question

A firm shuts down if price falls below the minimum of ______.

A. marginal cost
B. average variable cost
C. average total cost
Correct Answer: B

User Contributed Comments 5

User Comment
jmcohen87 why not A
surjoy Marginal cost in isolation does not convey much as it is change in cost for one additional unit. Hence comparison has to be made against AVC, ATC or AFC. See the study notes why AVC is used for this.
tommathew Marginal cost concept is used only to determine the optimum production quantity. Optinal quantity is when MR = MC.
For computation of profitability marginal cost is not used. Variable and fixed cost is used for this purpose.
YOUCANDOIT When price is above variable cost (but firm is still operating at a loss) the firm continues to operate because they can recover some of their fixed cost. When price < var. cost, firm would just shut down to minimize their losses to fixed costs (ex. rent). If it continues to operate they lose fixed cost + unrecoverable variable costs as well.
southeuro This is true ONLY in the short-run
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