Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Fixed costs become irrelevant as production increases.
B
Fixed costs decrease marginal costs, encouraging expansion.
C
Economies of scale reduce fixed costs, making expansion less viable.
D
Higher fixed costs can lead to increased marginal costs, which may deter expansion.
Understanding the Answer
Let's break down why this is correct
Answer
Fixed costs are expenses that do not change with the level of production, like rent or salaries. When a firm considers expanding production, it looks at how fixed costs can be spread over more units, which helps reduce the average cost per unit. This is known as economies of scale; as production increases, the average fixed cost per unit decreases, making it cheaper to produce each item. For example, if a factory pays $1,000 in rent and produces 100 items, the fixed cost per item is $10, but if production doubles to 200 items, the fixed cost per item drops to $5. Therefore, understanding fixed costs helps firms decide whether they can afford to produce more and if it will be profitable in the long run.
Detailed Explanation
When fixed costs are high, they can increase the cost of making each extra item, called marginal cost. Other options are incorrect because Some people think fixed costs don't matter when making more products; This option suggests that fixed costs lower the cost of making each item.
Key Concepts
economies of scale
marginal cost
Topic
Understanding Fixed Costs and Decisions
Difficulty
medium level question
Cognitive Level
understand
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