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Make a distinction between fixed and variable costs of production. Give examples of each.

      

Make a distinction between fixed and variable costs of production. Give examples of each.

  

Answers


Wilfred
1. Fixed Cost (FC): - Do not vary with the level of output i.e. remain constant (same) at all levels of possible output depending on the size of the plant eg. Administrative costs (in terms of salaries of top management etc), depreciation, rent & rates, interest on loans. Such costs are associated with the fixed inputs in the short-run. Fixed costs come about because in the short-run the firm cannot vary all its inputs. Fixed inputs are fixed by definition and those costs associated with fixed inputs constitute the firm?s total fixed cost.
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2. Variable cost (VC): - Vary directly with the possible levels of output both in short-run and long-run eg. raw material cost, cost of direct labour, running expenses of fixed capital such as fuel, ordinary repairs, routine maintenance, electricity etc. Such costs are associated with variable inputs in the short-run and long-run. Variable cost function takes the form TVC = f(Q). For a firm to increase its output level, it will require more variable inputs hence higher variable costs. Variable costs are often referred to as “direct costs” or “avoidable costs”. They can be avoided by not hiring the variable factor.
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Wilfykil answered the question on February 7, 2019 at 11:20


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