A firm that closes down will still incur

Analyze the question: The question asks which cost a firm still has to pay even when it shuts down and produces nothing (zero output).

Explain the concept:

• Fixed costs are costs that do not change with the level of output. Examples are rent, insurance, loan interest, and salaries of permanent staff. They must be paid even if output is zero.
• Variable costs change with output. Examples are raw materials, wages of casual workers, and fuel. When output is zero, they fall to zero.
• Total cost = fixed cost + variable cost.
• Marginal cost is the extra cost of producing one more unit. It is only relevant when production is taking place.

Step-by-step solution:

1. When a firm closes down, output = 0.
2. Variable cost at zero output = 0, so option A is ruled out.
3. Marginal cost relates to producing additional units. With no production, it does not arise, so option D is ruled out.
4. Total cost = fixed cost + 0 = fixed cost. Total cost is therefore technically equal to fixed cost in the short run. However, the cost that remains by its nature is the fixed cost, and that is what the question is testing. Option C is less precise because total cost includes a variable part that has vanished.
5. Fixed cost remains in the short run regardless of output, so the firm still incurs it.

Answer: B. fixed cost

Exam tip: Remember "Fixed = Fixed in place." Even if the factory is silent, the rent and loan repayments keep running. This is also why a firm in the short run continues operating as long as its price covers average variable cost, since shutting down would still leave it with the fixed cost.