If the firm shuts down, it must incur its fixed costs (FC) in the short run. In this case, the firm’s fixed cost is per day. In other words,
shuts down, the firm would suffer losses of per day until its fixed costs end (such as the expiration of a building lease).
This firm’s shutdown price-that is, the price below which it is optimal for the firm to shut down-is

Interestingly, the shutdown price can be determined by looking at variable costs and the contribution margin. If the price falls below the average variable cost (AVC), the firm would not be able to cover its variable costs; hence, it is better to shut down. This means the shutdown price is directly linked to the firm’s ability to cover these variable expenses without further losses.

In practice, many firms will closely monitor their pricing strategies around this shutdown point. For instance, businesses in the hospitality sector may reduce operating hours during off-peak seasons to avoid losses. Recognizing when to shift strategies can be critical in managing costs effectively while still positioning themselves to capitalize when demand picks up again!