3. Production, Costs & Revenue - FC & VC

Question 1

What are fixed costs?

Answer 1

Costs that do not vary with output

Question 2

What are some examples of fixed costs?

Answer 2

Salaries, advertising and rent

Question 3

On a graph what is the difference between average fixed cost and total fixed cost and why?

Answer 3

Total fixed cost will be a perfect the horizontal line average fixed cost however will be a downward sloping line which is also curved. This is because as a firm increases output they are able to spread the costs over a wire range of goods meaning the average decreases

Question 4

What are variable costs?

Answer 4

Costs that do vary with output

Question 5

What are some examples of variable costs?

Answer 5

Wages, raw material cost, fuel cost

Question 6

What is the shape of the average variable cost curve and how does the law of diminishing returns cause this?

Answer 6

The average variable cost curve is U-shaped this is because as more units are produced the costs are spread across a wider range of products. This continues until the law of diminishing returns means that increasing output further will be less efficient as workers are less productive meaning AVC will rise again.