Asked by Diana Olvera on Jun 30, 2024
Verified
A firm can minimize its losses by shutting down when ________ are less than ________ costs.
A) variable costs; fixed
B) fixed costs; variable
C) revenues; variable
D) operating profits; sunk
Variable Costs
Costs that vary directly with the level of production or output, such as materials and labor costs.
Fixed Costs
Costs that do not change with the amount of goods or services produced by a business over a certain period, such as rent, salaries, and insurance premiums.
- Discern the factors that influence a firm's decision to maintain operations or shutdown in the short term.
- Assess how fixed and variable costs affect a business's choices in its operational strategies.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
C
Explanation :
A firm can minimize its losses by shutting down when revenues are less than variable costs. This is because, at this point, the firm cannot cover the costs that vary with production, indicating that continuing operations would lead to greater losses than just bearing the fixed costs. Fixed costs are incurred regardless of production levels, so they are not a factor in the decision to shut down in the short run.
Learning Objectives
- Discern the factors that influence a firm's decision to maintain operations or shutdown in the short term.
- Assess how fixed and variable costs affect a business's choices in its operational strategies.