If a firm shuts down for a week, which of the following will be true of the firm's costs during time that it is shut down? total cost equals total fixed cost, total cost is zero, total variable cost exceeds total fixed cost
Of these options, the only one that is true of the firm is the first one. Its total costs and its fixed costs will be the same. To understand this, we must look at the two kinds of costs that go into total costs.
Fixed costs are those costs that remain the same regardless of how much or how little the firm produces. If we imagine a firm that sews t-shirts together, the fixed costs will be the rent on the building where it produces and the sewing machines that the workers use. The rent must be paid regardless of how many shirts are made. The sewing machines have already been bought and their costs do not change with how many shirts are made.
Variable costs do change depending on output. These would be things like the wages paid to the people who do the sewing, the material that is made into the shirts, and maintenance on the sewing machines since they need to be maintained when they get used a lot.
When the firm is shut down, it will have no variable costs. It will not be making anything so it will pay no wages and use no materials. Therefore, its variable costs cannot be greater than its total costs. Its total costs will not be zero because it still has fixed costs. It still has to pay the rent, for example. Since it has no variable costs, its fixed costs and its total costs will have to be the same. Therefore, the first choice is the best.
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