A firm shuts down in the short run when its revenue is less than fixed costs...

A firm shuts down in the short run when its revenue is less than fixed costs because fixed costs always have to be paid. True or False? Explain your reasoning.

Expert Solution

A firm shuts down in the short-run if its revenue is less than the variable costs as these costs always have to be paid.

Fixed costs are those expenses incurred in the process of production which are independent of the quantity of production. For example, rent on buildings, machinery cost etc. These expenses are already incurred and are not retreivable in the short-run i.e., they are deemed to be sunk costs and are considered to be unrecoverable in the short-run. Therefore, fixed costs are not considered in the short-run shut down decision making.

Variable costs are those costs which vary with the quantity of production such as the cost of raw materials, electricity costs, labor costs etc. These costs of production are to be paid based on the quantity of production and hence, variable costs must be covered by the revenue generated if a firm has to be in business in the short-run

Ans: False

Rahul Sunny answered 2 years ago

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