A firm will shut down in the short run if__________.

Option 1 -> When price falls below average variable cost, the firm cannot cover its variable costs of production.

Option 2 -> Average fixed cost is not the criterion for shutdown decisions since fixed costs must be paid regardless.

Option 3 -> If total revenue exceeds total cost, the firm is profitable and should continue operating.

Option 4 -> When price equals average cost, the firm breaks even with zero economic profit but should continue operating.

Hence, Option 1: Price < Average Variable Cost -> In the short run, a firm will shut down if price falls below average variable cost. This is because fixed costs must be paid regardless of production. If P < AVC, the firm loses more money by producing (losing fixed costs plus additional losses from not covering variable costs) than by shutting down (losing only fixed costs). The shutdown rule ensures the firm minimizes losses. However, if P ≥ AVC, even if the firm is making losses, it should continue operating because it can at least cover variable costs and contribute something toward fixed costs. -> correct