If the firm closed down in the short run and produced zero units of output, its total cost would be
The correct answer and explanation is:
If a firm closes down in the short run and produces zero units of output, its total cost would be equal to its total fixed costs.
Explanation:
In the short run, a firm’s costs are divided into two categories: fixed costs and variable costs. Fixed costs are the costs that do not change with the level of output, such as rent, insurance, and salaries of permanent staff. These costs are incurred even if the firm produces nothing.
When the firm shuts down, it stops producing any output, so it incurs no variable costs because these are tied to the level of production. However, fixed costs still remain, as they have to be paid regardless of production levels. For instance, a firm that rents a factory space still has to pay the rent even if it isn’t producing any goods.
Key Concept:
- Fixed Costs: These are incurred whether the firm is producing or not, such as capital, rent, and salaried labor. These are the costs the firm will still have to pay when it temporarily shuts down in the short run.
- Variable Costs: These vary with the level of output and include costs like raw materials, direct labor, and energy costs. In the shutdown scenario, the firm does not produce output, so these costs are zero.
In conclusion, when the firm produces zero output, its total cost is equal to the sum of its fixed costs since no variable costs are incurred. Therefore, the firm would still bear the fixed costs even though it is not operating. In the long run, if the firm cannot cover its total costs, it may decide to exit the market.