Question

2. Why can we make a distinction between fixed and variable costs in the short run? Provide examples of fixed and variable costs. "There are no fixed costs in the long run; all costs are variable." Explain.

Answer 1

In short run we have fixed cost as a sunk cost means if we don't produce anything we are in negative profit as fixed cost is need to be recovered.

Fixed cost is irrespective of production whereas variable cost is Propotional to it.

Hence in short run both the type of Costs taken into account as Average Total Cost ia higher.Average Total Cost= FC+VC/q

In Long run scenario we have fixed cost distributed equally over horizon period T which makes it equal to zero

Hence in long run as Fixed cost ia close to zero