Question

Match each type of cost with the pattern of its behavior as the firm increases its output: 1. Fixed cost, FC 2. Variable cost, VC 3. Average fixed cost.

Answer 1

Fixed costs remain constant regardless of output, variable costs vary with the level of output, and average fixed cost decreases as output increases. An example includes an internet company that has high fixed costs initially but lower variable costs once operational.

Step-by-step explanation:

To match each type of cost with the pattern of its behavior as the firm increases its output:

1. Fixed Cost (FC): This cost does not change as the output level changes. It remains constant, regardless of the increase or decrease in the quantity of goods or services produced or sold. Examples include rent, salaries, or the costs involved in setting up a website.
2. Variable Cost (VC): This cost varies directly with the level of output. As production increases, variable costs will also increase. For instance, costs of materials or labor directly involved in the production process.
3. Average Fixed Cost (AFC): This is calculated by dividing the total fixed cost by the number of units produced. It decreases as output increases because the fixed costs are being spread over more units.

For instance, an internet company providing medical advice may have high initial fixed costs for setting up the website and infrastructure but low ongoing variable costs for maintaining it. In contrast, a leaf-raking service might have low fixed costs but experience a sharp increase in variable costs and eventually average variable costs if demand surges.