Final answer:
The question centers on types of business costs, differentiating between fixed costs and variable costs. Fixed costs, such as rent, are incurred before production and are considered sunk costs, which should not influence future decisions. Variable costs like materials vary with production levels and are key for understanding the financial implications of increasing production.
Step-by-step explanation:
The question pertains to the various types of costs in business, specifically in the context of a partnership business operated by Lisa and Mark. In the short-run perspective, costs are categorized into two primary types: fixed costs and variable costs. Fixed costs are the expenses that do not change with the level of goods or services produced within a certain range of activity and are incurred before any production takes place. Examples include rent, salaries, and insurance. These costs are also considered sunk costs, which means they have already been incurred and cannot be recovered; as such, they should not affect future economic decisions about production or pricing.
On the other hand, variable costs are the costs that vary in direct proportion to changes in the level of production. These can include raw materials, hourly labor wages, and utilities that increase with production activity. Variable costs have implications for marginal returns and can inform decisions about scaling production since they affect the marginal cost of producing additional units, which typically rises due to the principle of diminishing marginal returns.
For a firm to be profitable, its total revenue must exceed its total costs, which includes both fixed and variable expenses. Therefore, understanding these various cost types is essential for making informed business decisions.