Which statement about fixed and variable costs as production increases is correct?

Which statement about fixed and variable costs as production increases is correct?

• A. Both fixed and variable costs rise proportionally
• B. Fixed costs rise, variable costs stay the same
• C. Fixed costs stay the same, variable costs increase with production
• D. Fixed costs decrease, variable costs increase

Answer: (C)

The main idea is how costs behave as output changes in the short run. Fixed costs do not change with the level of production—they are tied to the capacity or space you’ve already committed to, like rent, certain salaries, and insurance. Variable costs, however, depend on how much you produce, so they rise as more units are made because you need more raw materials, more direct labor, and more energy per additional unit. So when production increases, the total cost goes up mainly because variable costs rise, while the fixed costs stay constant. That’s why the correct statement is that fixed costs stay the same and variable costs increase with production. (Note: the fixed-cost per unit usually falls as output grows, since you’re spreading the same overhead over more units.)

The main idea is how costs behave as output changes in the short run. Fixed costs do not change with the level of production—they are tied to the capacity or space you’ve already committed to, like rent, certain salaries, and insurance. Variable costs, however, depend on how much you produce, so they rise as more units are made because you need more raw materials, more direct labor, and more energy per additional unit. So when production increases, the total cost goes up mainly because variable costs rise, while the fixed costs stay constant. That’s why the correct statement is that fixed costs stay the same and variable costs increase with production. (Note: the fixed-cost per unit usually falls as output grows, since you’re spreading the same overhead over more units.)