In the long-run, a firm must shut down if its average revenue is

Analyze the question: It asks when a firm must shut down, which depends on how its revenue compares with its costs.

Concept:

• Short run: A firm shuts down when average revenue (AR = price) falls below average variable cost (AVC). It cannot even cover its variable costs, so each unit produced adds to its losses. If AR is between AVC and ATC, it keeps producing in the short run because it still covers some fixed costs.
• Long run: All costs are variable, so the firm must cover average total cost (AC). If AR < AC, the firm makes continuous losses and exits the industry.

Checking each option:

• A. AR greater than AC: The firm makes supernormal profit. It stays and attracts new entrants. ❌
• B. AR equal to AC: The firm makes normal profit and breaks even. It stays. ❌
• C. AR equal to the minimum average revenue: This is not a meaningful shutdown condition. ❌
• D. AR less than average variable cost: This is the classic shutdown condition. If AR is below AVC, the firm cannot cover its variable costs, and so it is also below AC. The firm must shut down. ✅

Note on the wording: Strictly speaking, the long-run shutdown rule is AR < AC (average total cost), since in the long run all costs are variable. The question's options don't include that, though. Of the choices given, only D describes a situation where the firm must shut down. If AR is below AVC, it is certainly below AC, so the firm cannot survive in the long run either.

Answer: D

Exam tip: Remember it this way:

• AR < AVC → shut down immediately (short run)
• AR < AC → exit in the long run
• AR ≥ AC → stay

When the exact long-run option (AR < AC) isn't offered, pick the option that describes an unavoidable loss, which here is AR < AVC.