<P> A monopolist should shut down when price (average revenue) is less than average variable cost for every output level; in other words, it should shut down if the demand curve is entirely below the average variable cost curve . Under these circumstances, even at the profit - maximizing level of output (where MR = MC, marginal revenue equals marginal cost) average revenue would be lower than average variable costs and the monopolist would be better off shutting down in the short run . </P> <P> The short run shutdown point for a competitive firm is the output level at the minimum of the average variable cost curve . Assume that a firm's total cost function is TC = Q - 5Q + 60Q + 125 . Then its variable cost function is Q - 5Q + 60Q, and its average variable cost function is (Q - 5Q + 60Q) / Q = Q - 5Q + 60 . The slope of the average variable cost curve is the derivative of the latter, namely 2Q - 5 . Equating this to zero to find the minimum gives Q = 2.5, at which level of output average variable cost is 53.75 . Thus if the market price of the product drops below 53.75, the firm will choose to shut down production . </P> <P> The long run shutdown point for a competitive firm is the output level at the minimum of the average total cost curve . Assume that a firm's total cost function is the same as above example . To find the shut down point in the long run, first take the derivative of ATC and then set it to zero and solve for Q. After getting Q plug it into the MC to get the price . </P>

The firm should shut down if the quantity of output that it could sell falls below