Distinguish between fixed costs and variable costs.

OR

Explain the relationship between marginal cost and average cost.

Question

Distinguish between fixed costs and variable costs.

OR

Explain the relationship between marginal cost and average cost.

Accepted Answer

>

> [!TLDR]
> EITHER (i) Fixed costs are constant at every output level (incl. zero); variable costs move directly with output — OR (ii) Marginal Cost cuts Average Cost at AC's minimum point: MC lies below AC while AC is falling, and above AC while AC is rising.
>
> **Part A — Distinguish between fixed costs and variable costs:**
>
> | Basis | Fixed Cost | Variable Cost |
> |---|---|---|
> | Meaning | Cost that does NOT change with the level of output | Cost that changes directly with the level of output |
> | Behaviour at zero output | Must still be paid (e.g. rent, insurance) even if output is zero | Becomes zero when output is zero |
> | Examples | Rent of factory building, insurance premium, interest on loans, salaries of permanent staff | Cost of raw materials, wages of casual labour, cost of power/fuel used in production |
> | Also called | Supplementary cost / Overhead cost | Prime cost / Direct cost |
>
> **OR — Part B: Relationship between Marginal Cost (MC) and Average Cost (AC):**
>
> Both MC and AC are typically U-shaped curves, and they are mathematically linked: MC is the addition to Total Cost from producing one more unit, while AC is Total Cost spread evenly over all units.
>
> - When AC is FALLING, MC lies BELOW AC (an additional unit costing less than the current average pulls the average further down). …

A	B
11) SMC	a) Zero profit
12) Normal Profit	b) Non-monetary exchange
13) Domestic service	c) ΔTC/ΔQ
14) Money	d) Trade in goods and services
15) Balance of payment	e) QD = QS
	f) Medium of Exchange

Q.Distinguish between fixed costs and variable costs.

Concept understanding — Marginal Cost Average Variable Cost Relationship

The precise meaning

Why it matters

Basis	Fixed Cost	Variable Cost
Meaning	Cost that does NOT change with the level of output	Cost that changes directly with the level of output
Behaviour at zero output	Must still be paid (e.g. rent, insurance) even if output is zero	Becomes zero when output is zero
Examples	Rent of factory building, insurance premium, interest on loans, salaries of permanent staff	Cost of raw materials, wages of casual labour, cost of power/fuel used in production
Also called	Supplementary cost / Overhead cost	Prime cost / Direct cost

Q.Distinguish between fixed costs and variable costs.

🎓Unlock everything free for 14 days

Unlock everything free for 14 days