Question

A firm that shuts down temporarily has to pay a. its fixed costs but not its variable costs. b. its variable costs but not its fixed costs. c. both its variable costs and its fixed costs. d. neither its variable costs nor its fixed costs.

Answer 1

Answer:

its fixed costs but not its variable costs.

Explanation:

Fixed costs are costs that do not vary with output. e,g, rent, mortgage payments

If production is zero or if production is a million, Mortgage payments do not change - it remains the same no matter the level of output.

Hourly wage costs and payments for production inputs are variable costs

Variable costs are costs that vary with production

If a producer decides not to produce any output, there would be no need to hire labour and thus no need to pay hourly wages.

When a firm that shuts down temporarily, the firm would still  have to pay expenses such as rent and electricity bills. These constitute fixed cost. But the firm would not have to pay variable costs e.g. the cost of buying raw materials used in variation.

On the other hand, if the firm shuts down permanently, it would not pay both its variable costs and its fixed costs