Final answer:
When a firm operates above its relevant range, fixed expenses are likely to increase due to the need for additional capacity and associated costs. This can involve more frequent repairs, expansions in facilities, or increased staff requirements.
Step-by-step explanation:
When a firm operates above the upper boundary of the relevant range, fixed expenses are likely to increase. Fixed expenses are typically static within the relevant range of production; however, beyond this range, additional capacity may be required, leading to increased fixed costs such as additional rent, equipment, and possibly staff to manage the operations. For example, a manufacturing plant running 24/7 may have little time left for routine maintenance, escalating fixed costs as the firm needs to repair and replace equipment more frequently.
Within the relevant range, sunk costs, which are a type of fixed cost, do not change and should not affect future business decisions. However, once the firm surpasses this range, they may incur new sunk costs. As the firm’s activity level increases, economies of scale can be achieved to a point, after which diminishing marginal returns and increased wear on equipment can increase both variable and fixed costs.