The break-even point can be defined as the production and sales levels of a given product at which

the revenue generated from the sales is perfectly equal to the production cost. At this point, the

company does not make any profit or loss; that is, it breaks even.

The shut-down point refers to the minimum price where companies prefer shutting down their

operation instead of continuing to operate. In other words, it is the minimum price and quantity

for keeping operations open.

Break-even price P2

Shut-down price P1

MC

£

AVC

9₁ 9₂

ATC

As seen previously, the break-even point is the point where the marginal cost (MC) equals the

average total cost (ATC). The shut-down point of production, on the other hand, is the price at

which the marginal cost does not even cover the average variable cost (ATC). At this point, the

company is better off stopping its production than keeping producing at a loss.

Suppose the hospital operates in a perfectly competitive market. The market price of this product

is $40. Assume that a manufacturing company Total Cost (TC) function is

TC = 20Q6Q+Q"

What is the minimum market price for which you will choose to produce?