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Question:

rogerarnold
rogerarnold
Student
College - Sophomore

How do fixed costs impact the decision of whether to shut down, or cointinue to produce in a perfectly competitive setting?

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Posted by rogerarnold on Monday December 7, 2009 at 1:15 PM and tagged with business, economics, fixed costs, shut-down point.

Answers:


  1. pohnpei397 Teacher
    Community / Jr. College

    eNotes Editor

    In this situation, fixed costs have nothing to do with whether a firm will shut down or not.  The only thing that has any impact on whether the firm will shut down is whether the price that the firm can charge for each unit of a good or service produced is higher or lower than the average variable cost of producing that unit.

    Look at it this way -- if you can make $5 more per unit than your average variable costs, that can help you pay down your fixed costs, no matter how big or small they are.  No matter how much the fixed costs are, it's better to pay off some of them than not to.  So once you get above AVC, you're better off staying open no matter what size your fixed costs are.

    Rate answer:

    Posted by pohnpei397 on Monday December 7, 2009 at 1:28 PM