Question

1. What is the difference between fixed costs and variable costs?’

2. Are there fixed costs in the long run? Explain briefly.

3. Are fixed costs also sunk costs? Explain.

4. What are diminishing marginal returns as they relate to costs?

5. Which costs are measured on a per-unit basis: fixed costs, average cost, the average variable cost, variable costs, and marginal cost?

6. How is each of the following calculated: marginal cost, average total cost, average variable cost?

7. What shapes would you generally expect each of the following cost curves to have: fixed costs, variable costs, marginal costs, average total costs, and average variable costs?

8. What is a production technology?

9. In choosing a production technology, how will firms react if one input becomes relatively more expensive?

10. What is the long-run average cost curve?

Answer 1

Ans. 1) Fixed Cost is the cost which the firm incurs on fixed assets like land, building, plant and machinery,etc. They do not vary with the level of output.

On the other hand, variable cost refers to the cost which vary directly with the level of output like no of labour, raw material, etc.

2) No, there are no fixed costs in the long run.

This is because in the long run, plant and machinery, land, building, etc. which are considered fixed cost in short run, also vary with the level of output. In long run, to increase output we also have to upgrage machinery, building,etc so they are considered as variable cost.

3) Sunk costs are the cost which cannot be recovered.

Some fixed costs are sunk cost and some are not. For example, if a machine is purchased and after 1 year the business is shut down and the machine is resold at the book value, then this cannot be called as a sunk cost. Whereas if an asset purchased can't be sold when not needed will be termed as sunk cost.

4) Average cost and average Variable Cost.

This is because average itself means cost per unit. All the other costs are not per unit costs.