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A firm under perfect competition will not suspend production even when P<AC, but it will definitely do so if P<AVC. Explain using a diagram.
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The shut-down point refers to a situation when the firm is able to cover its variable cost only i.e AR = AVC.
At the shutdown point, the firm incurs a loss of fixed cost. The firm does not stop the production at this point as the fixed cost will still be incurred. However, if the price falls and the firm is unable to cover even it's variable cost then it will shut down the operations
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