Final answer:
Upstream costs are costs incurred before the production process, including research and material extraction, and are considered fixed and sunk costs by the firm.
Step-by-step explanation:
The student's question about costs sustained before production is upstream costs. These costs are associated with the activities that come before the production process, such as research, development, and raw material extraction. Fixed costs, which the firm cannot alter and must incur before producing any output, fall into this category, and they can be considered sunk costs—costs that have already been incurred and cannot be recovered. It's important for the firm to distinguish between these and variable costs, which are incurred during production and can vary based on the level of output. Understanding these costs is crucial for making economic decisions about future production or pricing.
In this context, the fixed costs, which are also upstream costs, are contrasted with variable costs that show diminishing marginal returns, meaning as more units are produced, the additional cost of producing an extra unit increases. This helps to form the basis of pricing strategies and decisions about the level of production that the firm should engage in.