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 \( \$ 1,600,000 \) per day. In other words, shuts down, the firm would suffer losses of \( \$ 1,600,000 \) 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

Assume that the firm's total cost consists of fixed costs (FC) and variable costs (VC). In the short run, fixed costs must be paid regardless of production, so if the firm shuts down it loses its fixed costs (here, \(\$1{,}600{,}000\) per day). However, if the firm operates, it will incur both fixed and variable costs. The shutdown rule tells us that a firm should produce only if the market price \(P\) is at least as high as the average variable cost (AVC). In other words, the firm should produce if \[ P \geq \text{AVC} \] and shut down (produce zero output) if \[ P < \text{AVC}. \] Thus, the “shutdown price” is defined as the minimum point of the average variable cost curve: \[ P_{\text{shutdown}} = \min (\text{AVC}). \] If the market price falls below this level, the firm cannot cover its variable costs over and above the sunk fixed costs, and it is optimal to cease production temporarily, incurring only its fixed costs.