Question

Goods and services provided by internal service funds to other departments of the government are typically priced to:

1) Cover variable costs only.
2) Cover full costs (both fixed and variable).
3) Cover full costs, plus an additional charge to capital maintenance and anticipated expansion needs.
4) Cover full costs, plus an additional charge to ensure a reasonable profit.

Answer 1

Government departments' internal service funds generally price goods and services to cover full costs (both fixed and variable), which may also include additional charges for capital maintenance and future expansion.

Step-by-step explanation:

When internal service funds in government departments provide goods and services to other departments, the pricing is typically established to cover more than just the variable costs. In a short-run perspective, the costs can be divided into fixed and variable costs. Fixed costs, such as capital or rent, are stagnant and don't change with the level of production. On the other hand, variable costs fluctuate depending on production levels and often show diminishing marginal returns, leading to higher marginal costs with increased output. To sustain the service and account for future needs, the pricing is usually set to cover the full costs (including fixed and variable costs), plus sometimes an additional charge for capital maintenance and anticipated expansion needs.