So let's compare the profit or loss of the firm at two points: when Q=0 (and thus AVC=0), and when Q>0 (and, as stated in the question, P<AVC, and thus MR<AVC). The firm is losing money for every Q>0, because it is spending more on AVC than it is bringing in as price or marginal revenue. The firm can reduce its loss by making Q=0. In other words, the firm is better off by completely shutting down. | So let's compare the profit or loss of the firm at two points: when Q=0 (and thus AVC=0), and when Q>0 (and, as stated in the question, P<AVC, and thus MR<AVC). The firm is losing money for every Q>0, because it is spending more on AVC than it is bringing in as price or marginal revenue. The firm can reduce its loss by making Q=0. In other words, the firm is better off by completely shutting down. |