Question

The table below shows the average cost of a firm depending on the level of production.

Q	0	1	2	3	4	5	6
AC	--	32	24	20	24	25	26

Assuming that the company is operating in the long run what are fixed costs?

Answer 1

Since the time period is long run, fixed costs are zero. In the short-run, firms incur both fixed and variable costs. Firms can increase productivity by changing the quantities employed of only a few factors like labor in the short-run but not other factors like land (rent). But in the long-run all short-run fixed factors can become variable as there is time to increase their quantity employed in production. For instance, it is possible for a firm to look for better warehouses for its products in the long-run and thereby incur varying costs for the warehouses, that is, the rent. But in the short-run, there is not enough time to pursue such options (for warehousing) and so the firm has to manage with the existing warehouse alone, the rent on which remains fixed.

Hence, the company incurs no fixed costs in the given question as the time period under consideration is long-run in which all factors are only variable.