shut down immediately, since it is not even covering its variable costs.

First consider the upper zone, where prices are above the level where marginal cost (MC) crosses average cost

(AC) at the zero profit point. At any price above that level, the firm will earn profits in the short run. If the price

falls exactly on the break even point where the MC and AC curves cross, then the firm earns zero profits. If a

price falls into the zone between the break even point, where MC crosses AC, and the shutdown point, where

MC crosses AVC, the firm will be making losses in the short run—but since the firm is more than covering its

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8.2 • How Perfectly Competitive Firms Make Output Decisions 201

variable costs, the losses are smaller than if the firm shut down immediately. Finally, consider a price at or

below the shutdown point where MC crosses AVC. At any price like this one, the firm will shut down
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