If a firm's fixed costs are larger than its variable costs, does this mean the firm should shut down operation in the short run?
Explain.
A. This does not necessarily mean that it should shut down, because that decision depends on whether total revenue is larger than variable costs
B. Yes, the firm should shut down because this means that the firm is not covering its fixed costs.
C.This does not necessarily mean that it should shut down, because that decision depends on whether marginal revenue is equal to marginal cost.
D.Yes, the firm should shut down because it is incurring a loss
A. This does not necessarily mean that it should shut down, because that decision depends on whether total revenue is larger than variable costs.
Explanation: Fixed costs are costs that do not vary with the level of output, such as rent, insurance, and salaries. Variable costs are costs that increase as the level of output increases, such as raw material costs and electricity.
If a firm's fixed costs are larger than its variable costs, it means that it has high overhead costs that are not affected by the level of production. However, this does not necessarily mean that the firm should shut down its operations in the short run.
The decision to shut down depends on whether the firm's total revenue (TR) is larger than its variable costs (VC). If TR is larger than VC, the firm is generating enough revenue to cover its variable costs and some of its fixed costs, and it should continue operations. If TR is less than VC, the firm is not generating enough revenue to cover even its variable costs, and it should shut down in the short run.
Therefore, the firm's decision to shut down in the short run depends on its total revenue, not just its fixed costs compared to its variable costs.