Final answer:
In the long run, a firm incurs both fixed and variable costs as it aims to recover these through total revenue to earn a profit. Fixed costs remain constant over time, while variable costs fluctuate with the level of production. Firms can optimize both types of costs in the long run.
Step-by-step explanation:
In the long run, when the firm has time to recover both fixed and variable costs, the firm incurs both fixed and variable costs. Fixed costs, such as rent or salaries, are those that do not change with the level of production. Variable costs, on the other hand, fluctuate with production levels and include expenses like raw materials and labor directly associated with the production process.
In the short run, fixed costs are considered sunk costs and do not play a role in economic decisions about future production or pricing. However, in the long run, firms aim to recover both types of costs through their total revenue. To earn a profit, total revenue must exceed both fixed and variable costs.
Unlike in the short run, where only variable costs can typically be adjusted, in the long run, firms can make changes to their structure and operations in an attempt to optimize both their fixed and variable costs.