IGCSE Economics Paper-2: Specimen Questions with Answers 49 - 49 of 100

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Passage

Setting prices of the product is difficult. Too high prices can lead to reduction in sales.

Question 49 (3 of 5 Based on Passage)

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Short Answer▾

When a firm should shut down?

Explanation

  • A shutdown point refers to a point where the company stops getting profit. It is a point where a company experiences no benefit in continuing with the operations and thus it decides to shut down its production either temporarily or permanently.
  • A shut down point can be determined when the production leads to the combination of output and price where the company starts earning only enough revenue to cover its total variable costs. The shutdown point depicts the point when a company՚s (marginal) revenue is equal to its variable (marginal) costs.

  • In other words, shut down point occurs when the marginal profit turns negative or a firm starts getting losses.
  • At the shutdown point, the firm gets no economic benefit in continuing with the production. So, if a firm gets additional loss, either through an increase in variable costs or a decrease in revenue, the cost of operation will increase in comparison with the revenue.
  • At that point , shutting down operations is a better option than continuing the production. If the situation is reversed, continuing production is a better option. If a company can produce revenues more than or equal to the total variable costs of production, it can use the additional revenues to pay down its fixed costs.

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