Question

3. Answer all three parts:

1. Why can the distinction between fixed costs and variable costs be made in the short run?

2. Classify the following as fixed or variable costs:
   • advertising expenditures
   • fuel
   • interest on company-issued bonds
   • shipping charges
   • payments for raw materials
   • real estate taxes
   • executive salaries
   • insurance premiums
   • wage payments
   • depreciation and obsolescence charge
   • sales taxes
   • rental payments on leased office machinery.

3. What happens to all costs of production in the long-run?

4. Government can use direct controls in the form of legislation to reduce negative externalities such as water pollution. The EPA is responsible for the enforcement of the Clean Water Act. What success(es) has the EPA had with respect to enforcing clean water standards? What is it doing now?

Answer 1

*W ea re supposed to do only one question. Please post unrelated questions separately.

3)

A) The distinction between the fixed cost and variable cost can be made in the short run because in the short run the capital is assumed to be fixed. Thus its cost amounts to fixed cost and the labor csts are taken as variable cost.

B)

Fixed Cost	Variable Cost
Advertising Expenditures	Fuel
Interest on company issued bonds	Sipping Charges
Real estate taxes	Payment for Raw Material
Executive Salaries	Wage Payments
Insurance premiums	Sales Tax
Depreciation and obsolence charge
Rental payments on leased office machinery

C) In the long run all cost of production are variable as all the factors of production are variable.