Question

Briefly explain what is meant by the term "fixed costs" and provide three examples of same. What determines a firm's level of fixed costs?

Answer 1

As the name suggests, they represent a cost of production which is spent on fixed factors of production. Fixed cost is generally independent of the level of output because it has to be paid periodically even if there is no production. The lease payment insurance and tax payment, interest payment on loans, cost incurred on furniture, equipment building, another social overhead cost all are a part of fixed cost of production. Fixed cost are determined by the fixed factors of production used by the firm. as mentioned they are not determined by the level of output but by the time period in which some factors are considered fixed and the others are considered variable.