Which area on the graph signals a shutdown for a monopoly?

• A. Above the line MC = AVC
• B. Under the line MC = AVC
• C. Between MC = ATC and MC = AVC
• D. Above the line ATC = MC

Answer: (B)

In the short run a monopoly (like any firm) should continue producing only if it can cover its variable costs. Fixed costs are sunk in the short run, so they don’t affect the decision to operate. The threshold is the minimum point of average variable cost (AVC), because when price falls below AVC, the firm wouldn’t even cover its variable costs for any output, and it’s better to shut down.

That minimum of AVC occurs where marginal cost equals AVC. So the shutdown region on the graph is the area where the price (the value the firm gets for its output) is below that boundary. In other words, producing would not cover variable costs, so the firm should shut down. Regions where price is above AVC mean the firm can cover variable costs (and possibly some or all fixed costs), so production is pursued, with profits or losses depending on how it compares to total costs.