Question

Write four distinguish between total variable cost and total fixed cost.

Hint:

In the short run, a firm cannot change its fixed costs, but it can change its variable costs based on output levels.

Answer 1

Step 1: Understand Total Variable Cost (TVC).
Total Variable Cost (TVC) refers to the cost that changes with the level of output. It increases as production increases and decreases when production decreases. Examples include labor and raw materials.

Step 2: Understand Total Fixed Cost (TFC).
Total Fixed Cost (TFC) is the cost that does not change with the level of output. It remains constant even if production increases or decreases. Examples include rent, salaries of permanent staff, and depreciation of machinery.

Step 3: Comparison.
- TVC varies with the level of output, while TFC remains constant regardless of output.
- TVC includes costs for inputs that are used in the production process, while TFC includes costs that are incurred even when production is zero.
- TVC is associated with variable inputs, while TFC is related to fixed inputs.
- TVC can be reduced by cutting back on production, while TFC cannot be reduced without altering the scale of operations.