Final answer:
The best costs to consider when making decisions are relevant costs, as they include any expenses directly related to the decision that will affect future cash flows. Fixed costs are typically sunk and should not influence decisions unless they change due to the decision. All costs that will change as a result of the decision should be considered for sound economic analysis.
Step-by-step explanation:
When making decisions, it is best to use relevant costs. Relevant costs are costs that are directly related to a specific decision and will have an impact on the future cash flows of the firm. These include both variable and fixed costs but only if they will change as a result of the decision being made. Average costs, although informative, can be misleading for decision-making because they may include sunk costs which are irrelevant for future decisions. Fixed costs are typically sunk costs and should not influence decisions unless they will change as a result of the decision.
Variable costs are the costs that a firm incurs in the process of producing which vary with the level of production. These costs are important to consider but focusing only on marginal or variable costs without considering other relevant factors could lead to suboptimal decisions.
It is essential to consider all costs that will change as a result of the decision when deciding on production levels, pricing, or undertaking new projects. By using relevant cost analysis, a business can make more informed and economically sound decisions that enhance its profitability and efficiency.