Chapter 7: Problem 20

Are there fixed costs in the long-run? Explain briefly.

Short Answer

Expert verified

In the long run, all costs become variable, allowing firms to adjust their operations and make changes to factors such as property size, machines, and labor. As a result, there are no fixed costs in the long run, since all costs can be altered in response to market changes or the firm's output. The distinction between fixed and variable costs no longer holds in the long run, as firms have the flexibility to change all inputs, including those that were once considered fixed in the short run.

Step by step solution

Define Fixed Costs

Fixed costs refer to costs that remain constant regardless of the level of output a firm produces. These costs include expenses like rent, insurance, and salaries of employees whose compensation does not depend on the firm's output.

Discuss the Long Run

In economics, the long run is a period in which all inputs used in production can be adjusted. This means that a firm can change its scale of operation by altering any and all costs, including variable costs such as labor and raw materials, and fixed costs like rent and machinery.

Determine the Existence of Fixed Costs in the Long Run

In the long run, all costs become variable, as firms have the flexibility to adjust their operations and make changes to factors like the size of the property, machines, and labor. As a result, there are no fixed costs in the long-run because all costs can be adjusted in response to changes in the market or the firm's output.

Provide a Brief Explanation

In summary, fixed costs do not exist in the long run because all costs can be altered as firms adjust their scale of operations. In the long run, the distinction between fixed and variable costs no longer holds, as firms have the flexibility to change all inputs, including those that were once considered fixed in the short run. This allows firms to adapt to changes in the market, operating conditions, and output levels.

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