Final answer:
In the short run, a firm must pay fixed costs even if it shuts down, and should do so if the price falls below the shutdown point where it can't cover variable costs.
Step-by-step explanation:
When a firm shuts down in the short run, it must still pay the fixed costs. These costs are independent of production level and have to be paid even if the output is zero. Deciding whether to shut down or continue production involves comparing these fixed costs with potential losses from continued operation. If the price of the product falls below the shutdown point, where marginal cost (MC) crosses average variable cost (AVC), a firm should shut down immediately since it can't even cover its variable costs.
In the short run, when a firm shuts down, it must still pay the fixed costs.
Fixed costs are expenses that do not change with the level of production, such as rent, insurance, and salaries. These costs must be paid regardless of whether the firm is producing or not.
Variable costs, on the other hand, are expenses that change with the level of production, such as raw materials and direct labor. These costs would be eliminated if the firm shuts down and stops producing.