Question

Explain one fixed and variable cost, if you were a manager of a fast food restaurant.

Analyze how a firm is able to deal with these costs if the business starts to slow down.

Explain how a firm is able to increase their profits.

Answer 1

Fixed costs are those costs that have to be paid irrespective of the output.Example-Rent.

Variable cost is dependent on the number of inputs.Variable costs can be changed.Example-Wage rate to labour.

As business starts to slow down,a firm focuses on reducing the variable cost and cutting on unnecessary expenses.The salaries of workers are reduced.Firm focuses on covering the average variable cost.

A firm is able to increase profits by reducing cost and increasing output.The higher the difference between costs and revenue,the higher the profit