- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 4. Breakeven Analysis and Shutdown Decision
CFA Practice Question
A firm should cease to do business when ______.
A. price < average variable cost
B. price < marginal cost
C. price < average total cost
Explanation: A firm should cease to do business when P < AVC. In this case the company is not even making incremental revenue for each additional product sold. When AVC < P < ATC, the firm - while not profitable - will be making money above its variable costs. If P < MC or ATC < MC, the firm may be profitable but is not maximizing profit potential.
User Contributed Comments 2
| User | Comment |
|---|---|
| 0000 | You should cease to business in the short run AND long run when price < AVC and cease to business in long run when price < ATC. |
| farhan92 | by cease to do business they don't mean shut down? |