1. **Problem statement:** The firm sells output at price $P=120$. We need to decide if the firm should produce in the short run given two scenarios for average variable cost (AVC) at optimal quantity $Q$: $AVC=100$ and $AVC=130$. 2. **Formula and rule:** The shutdown rule states that a firm should continue producing in the short run if the price $P$ is at least equal to the average variable cost $AVC$ at the optimal output. Mathematically, produce if $$P \geq AVC$$ and shut down if $$P < AVC$$. 3. **Scenario 1: $AVC=100$** - Given $P=120$ and $AVC=100$, since $$120 \geq 100$$, the firm should produce in the short run. 4. **Scenario 2: $AVC=130$** - Given $P=120$ and $AVC=130$, since $$120 < 130$$, the firm should shut down in the short run. 5. **Shutdown rule explained in managerial terms:** - The shutdown rule means that if the price the firm receives for its product does not cover the variable costs of production, it is better to stop producing temporarily to avoid incurring losses greater than fixed costs. - Producing when price is below AVC means losing more money on each unit than the fixed costs alone, so shutting down minimizes losses. - If price covers AVC, the firm can cover variable costs and contribute something towards fixed costs, so it should continue producing. **Final answers:** - Produce if $AVC=100$. - Shut down if $AVC=130$.