Price Determination in Different MarketsPYQ - Dec 2022Question 70 of 20

A firm encounters its "shutdown point" when:

Options

AAverage total cost equals price at the profit-maximizing level of output

BAverage variable cost equals price at the profit-maximizing level of output

CAverage fixed cost equals price at the profit-maximizing level of output

DMarginal cost equals price at the profit-maximizing level of output

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Correct Answer

✅ Option b — Average variable cost equals price at the profit-maximizing level of output

All Options:

AAverage total cost equals price at the profit-maximizing level of output
BAverage variable cost equals price at the profit-maximizing level of output
CAverage fixed cost equals price at the profit-maximizing level of output
DMarginal cost equals price at the profit-maximizing level of output

Detailed Solution & Explanation

To understand the shutdown point, we need to consider the behavior of a firm in the short run. • The shutdown point is where the firm decides to stop producing because the revenue is not enough to cover the variable costs. • At this point, the firm will minimize its losses by shutting down production, as continuing to produce would increase losses. • The shutdown point occurs when the price of the product equals the average variable cost (AVC) at the profit-maximizing level of output. • This is because if the price is below the AVC, the firm will incur losses on each unit produced, making it rational to shut down. The correct answer is right because it is based on the concept of shutdown point, where the firm stops production to minimize losses. The incorrect options, such as average total cost equals price, are not correct because the firm will consider shutting down based on variable costs, not total costs, as fixed costs are sunk and will be incurred regardless of production. Similarly, marginal cost equals price is a condition for profit maximization, not shutdown.

About This Chapter: Price Determination

Paper

Paper 4: Business Economics

Weightage

15%

Key Topics

Perfect Competition, Monopoly, Monopolistic, Oligopoly

This high-weightage chapter covers all four market structures: Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. Students learn how price and output are determined under each structure, along with key concepts like Price Discrimination, Kinked Demand Curve, and the conditions of equilibrium (MR = MC).

View Official ICAI Syllabus

Exam Strategy Tip

This chapter carries the highest weightage (~15%). Focus on features of each market, the shape of AR and MR curves, and understand why firms in Perfect Competition are 'Price Takers' while Monopolists are 'Price Makers'.

Related Comparison Tables

Fixed Cost vs Variable Cost: Cost Concepts

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