Practice Quiz

AP Microeconomics

Category - Microeconomics

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Fae owns Sweetpea Bakery. Prior to this past week, Sweetpea Bakery has been perfectly competitive. Now, the bakery must close. In the short run, which of the following must Fae pay?
  1. All of the costs of running Sweetpea Bakery-fixed and variable
  2. None of the costs, whether fixed or variable
  3. Only fixed costs
  4. Only variable costs
Explanation
Answer - C - In the short run, Fae must only pay the fixed costs of running Sweetpea Bakery.

Key Takeaway: When a business shuts down, firms must only pay the fixed costs of running the business. This is because the variable resources can, in the short term, be taken down to zero, whereas the fixed resources cannot.
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