The Shutdown Decision

The shutdown point: the minimum AVC point

The breakeven poin: the minimum ATC point

[Practice Problems] A company has total variable costs of $4 million and fixed costs of $3 million. Based on this information, the company will stay in the market in the long term if total revenue is at least:

A. $3.0 million.

B. $4.5 million.

C. $7.0 million.

[Solutions] C

A company will stay in the market in the long term if total revenue is equal to or greater than total cost. Because total costs are $7 million ($4 million variable costs and $3 million fixed costs), the company will stay in the market in the long term if total revenue equals at least $7 million.