Answer: average variable cost is higher than average revenue.

## Explanation In a perfectly competitive market, a firm's short-run shutdown decision is based on whether it can cover its variable costs, not its fixed costs. **Key Concepts:** 1. **Shutdown Point**: In the short run, a firm will shut down production when price (average revenue) falls below average variable cost (AVC). 2. **Fixed Costs**: Fixed costs are sunk in the short run and must be paid regardless of production level. 3. **Variable Costs**: Variable costs can be avoided by shutting down production. **Analysis of Options:** - **Option A**: Average total cost includes both fixed and variable costs. A firm may continue operating even if ATC > MR as long as it can cover variable costs. - **Option B**: Average fixed cost is irrelevant for shutdown decisions since fixed costs are sunk in the short run. - **Option C**: **CORRECT**. When average variable cost > average revenue (price), the firm cannot cover its variable costs and should shut down to minimize losses. **Economic Rationale:** - If P < AVC, the firm loses money on every unit produced. - By shutting down, the firm only loses its fixed costs. - By continuing to operate when P < AVC, the firm loses both fixed costs AND the difference between AVC and P on each unit. **Example**: If AVC = $10, P = $8, and fixed costs = $1000: - Operating: Loss = Fixed costs + (AVC - P) × Q = $1000 + $2 × Q - Shutting down: Loss = Fixed costs = $1000 - Clearly, shutting down minimizes losses when P < AVC.

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