Principles of Microeconomics / Unit 7 MIC 0618 worked example, 60 to 90 seconds
Locating Break-Even and Shutdown on a Table
The idea
From a cost table, compute average variable cost and average total cost at each output. The shutdown point is at the output where average variable cost is lowest, and the shutdown price is that minimum. The break-even point is at the output where average total cost is lowest, and the break-even price is that minimum. Check both against marginal cost: it should be below each average on the row before its minimum and above it on the row after.
In practice
Worked example: the farm's average variable cost runs twenty, sixteen, fourteen, thirteen fifty, fourteen, fifteen, about sixteen twenty-nine, seventeen seventy-five for one to eight flats, lowest at four flats: the shutdown price is thirteen fifty. Average total cost runs eighty, forty-six, thirty-four, twenty-eight fifty, twenty-six, twenty-five, about twenty-four eighty-six, twenty-five twenty-five, lowest at seven flats: the break-even price is about twenty-four eighty-six. Marginal cost was twelve before four flats and sixteen after; twenty-four before seven flats and twenty-eight after.
Where people slip
The two minima are at different outputs, four and seven here, and the error is to assume one crossing serves both. And with whole-unit rows the crossing is bracketed: marginal cost passes the average between rows, so read the minimum row, not an exact equality.
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