Final answer:
Variable costs can be reduced to zero if a firm stops production, but fixed costs remain. A firm's shutdown point is when market price falls below its average variable cost, indicating it should cease production to minimize losses.
Step-by-step explanation:
The statement at the beginning is incorrect; variable costs are not the costs that remain to be paid if the firm shuts down temporarily. Instead, variable costs vary with production levels and can be reduced to zero if a firm stops producing goods or services. In contrast, fixed costs must be paid regardless of whether a firm is in operation or not.
The shutdown point for a firm is reached when the price it can obtain for its product falls below the average variable cost (AVC) of production. At this point, the firm cannot cover its variable costs, and it would minimize its losses by ceasing production. The firm will still incur losses due to fixed costs that are already incurred, but by not producing, it avoids incurring additional variable costs. The average variable cost curve is important as it helps the firm decide whether to shut down immediately or continue operating. If the market price is below the AVC at the intersection with the marginal cost (MC) curve, the firm should shut down to prevent further losses.