Question

In the short run time horizon for a firm, total fixed costs:

a) decrease and then increase as output increases.
b) decrease as output increases.
c) do not vary with output.
d) increase and then decrease as output increases.
e) are equal to total variable costs.

Answer 1

In the short run, total fixed costs do not vary with output and are considered sunk costs, unlike variable costs, which increase with output.

Step-by-step explanation:

In the short-run time horizon for a firm, total fixed costs are costs that do not vary with the level of output produced. They are considered sunk costs, which means they have already been incurred and cannot be altered by current or future actions. Fixed costs are exemplified by rent, salaries, and insurance, which remain constant regardless of the firm's output level. On the other hand, variable costs change with the level of output, as they are associated with the cost of the variable inputs like labor and raw materials. Therefore, as output increases, variable costs increase due to the need for more resources to produce the additional output.

To answer the student's question directly, for letter c), 'do not vary with output' accurately describes how total fixed costs behave in the short run. Fixed costs will be the same no matter how many units of output are produced, as they are not dependent on production levels.