JOURNAL OF HIGHER EDUCATION THEORY AND PRACTICE

Two Problems with the Shutdown Rule in Introductory Economics Textbooks

Author(s): John Stinespring, Brian T. Kench

Citation: John Stinespring, Brian T. Kench, (2013) "Two Problems with the Shutdown Rule in Introductory Economics Textbooks," Journal of Higher Education Theory and Practice, Vol.13, Iss. 1, pp. 62 - 69

Article Type: Research paper

Publisher: North American Business Press

Abstract:

Two problems exist with the so-called shutdown rule in introductory economics textbooks: sunk costs are

included in the calculation of firm production costs and non-sunk fixed costs are ignored in the

calculation of costs and the firm’s short-run shutdown decision. When production costs only include

opportunity cost—and not sunk costs— firms shut down when total revenue is less than total cost. This

rule is attractive because it uses only relevant economic costs, follows the long-run exit rule, and is

economically intuitive: produce if economic profit is greater than or equal to zero.