What kinds of costs are involved in making a decision to shut down?

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When a firm is making the decision about whether to shut down, it considers only one kind of cost.  In addition, it considers one aspect of revenue.

The only cost that a firm should consider when making this decision is its average variable cost.  Its total costs do not matter and neither do its fixed costs.  What the firm must determine is whether its average variable costs are higher than the marginal revenue that it can receive if it stays open.  If the average variable costs are higher, it should shut down.  If the average variable costs are lower than the marginal...

(The entire section contains 310 words.)

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