-3-Ch9

5.Variable cost and fixed cost

a.TFA variable cost is a cost that varies with the level of production or output.

b.TFVariable costs can never increase or decrease.

c.TFA fixed cost is a cost that does not vary with the level of production or output.

d.TFFixed costs can never increase or decrease.

e.TFFixed costs are associated with any input whose price is fixed.

f.TFFixed costs are irrelevant for operating decisions or deciding how much to produce.

g.TFTotal fixed costs equal zero when the firm decides to temporarily close down.

6.Production and costs in the long run

a.The long run can be called the planning horizon because:

b.TFTotal fixed costs are zero in the long run.

c.TFTotal variable costs are zero in the long run.

d.TFThe law of diminishing returns applies in the long run.

e.If a firm increases all inputs by 10% and output increases by 20%,

then long-run average (per unit) costs would ____________________;

the economic term for this is ___________________________________.

f.Factors that explain (e) include:

g.If a firm increases all inputs by 10% and output increases by 5%,

then long-run average (per unit) costs would ____________________;

the economic term for this is ___________________________________.

h.The main factor that explains (g) is: