Which statement best distinguishes fixed costs from variable costs?

• A. Fixed costs remain constant regardless of output; variable costs change with output.
• B. Fixed costs increase with output; variable costs stay constant.
• C. Fixed costs are only relevant in the long run.
• D. Fixed costs are always zero in the long run.

Answer: (A)

The main idea is how costs respond to changes in production. Fixed costs stay the same no matter how much you produce (within the relevant range), so they don’t rise or fall with output. Think of rent for a factory or a salaried manager; these costs are incurred even if you produce nothing. Variable costs, on the other hand, move with output—materials, direct labor, and utilities used in making goods increase as you produce more. Because total cost equals fixed plus variable costs, fixed costs show up as a constant base on the cost curve while variable costs determine how steep the curve is as output grows. This is also why spreading fixed costs over more units can lower average cost at higher output. The other statements don’t fit: fixed costs don’t automatically increase with production, they’re not only relevant in the long run, and they aren’t necessarily zero in the long run.