Question

A step cost function with very wide steps may often behave as what type of cost within the relevant range?

Fixed.

Variable.

Mixed.

Sunk.

Answer 1

Answer- B. Fixed Cost.

Explanation-

Mixed cost is the combination of fixed and variable cost. It does not proportionately change with the level of output but change after a relevant range of output. It is also known as semi variable cost. It behaves like it increases one steps and then remains same or fixed for certain relevant range and after that range it again increases. This is also known as step fixed cost as it remains fixed for certain relevant range. Since it remains fixed for a relevant range in step cost it often behaves as Fixed cost within the relevant range.

Fixed costs are those cost which remains constant irrespective of the level of output. Examples are depreciation, Rent etc.

A variable cost is the cost which varies directly and proportionately with the level of output. Examples are direct material, direct labour, selling Commission based on number of units etc.

Sunk Cost is the cost that an entity has incurred and is no longer recoverable. It should never be considered in decision making. Examples as survey cost of a project, rent paid for the period expired etc.

Thus it becomes clear that a step cost function with very wide steps may often behave as fixed cost within the relevant range.