Question

Suppose that you and your co-worker have started a small business such as a bakery. List two fixed costs that you would incur describe why they are considered fixed. List two of your variable costs and describe why they are variable

Answer 1

Fixed costs are the costs which do not change with the change in output. Variable costs are the costs which change with the level of output.

Two examples of fixed costs are 1. rent for the shop and 2. cost of the oven

These are the costs which must be incurred even when the output is zero. Therefore these are fixed costs.

Two variable costs are 1. costs of labor and 2. costs of raw materials

These two costs will change depending on the number of outputs produced. So, these are variable costs.