Final answer:
Fixed costs are tied to a company's operations and remain unchanged regardless of whether a specific product is eliminated, as they are sunk costs. Variable costs vary with production levels and provide information on cost-cutting capabilities and potential cost increases with higher output. Understanding both is essential for making informed economic decisions.
Step-by-step explanation:
Fixed costs arise due to the overall operations of the company and would not disappear if a particular product were eliminated. Fixed costs are often considered sunk costs, which means they have already been spent and cannot be recovered, thus they should not factor into future economic decisions about production or pricing. This is contrasted with variable costs, which are directly related to the level of production and provide insights on the firm's ability to reduce expenses in the present and the extent to which costs will increase as production scales up.
In the short-run, a firm's total costs are the sum of fixed costs, which do not change with the level of output, and variable costs, which do change with the level of output. Understanding this distinction is crucial for a firm's economic decisions, as diminishing marginal returns can cause the marginal cost of production to rise, affecting the decision about how much to produce.