By shutting down, a firm
A)stops receiving revenue but continues to pay variable costs.
B)stops receiving revenue and is stuck with its fixed costs.
C)avoids its sunk costs as well as its variable costs.
D)can avoid paying taxes on its previously earned profits.

Question

Quizplus · Accepted Answer

When a firm shuts down, it stops receiving revenue but is still obligated to pay its fixed costs, such as rent, salaries of permanent employees, and debt payments. Variable costs can be avoided by not producing, but fixed costs cannot be avoided. Therefore, choice B is the correct answer. Choices A, C, and D are not accurate because variable costs can be avoided by not producing, sunk costs are not avoidable, and taxes are still owed on previously earned profits.

By Shutting Down, a Firm