A Level Economics AQA Practice Exam

How is total cost calculated?

1. Fixed costs - variable costs

2. Fixed costs + variable costs

3. Average costs × output

4. Variable costs ÷ output

The correct answer is: Fixed costs + variable costs

Total cost is calculated by adding fixed costs and variable costs together. Fixed costs are expenses that do not change with the level of output, such as rent or salaries, while variable costs vary directly with production levels, such as materials and labor costs associated with producing goods. When determining the total cost of production, it's essential to account for both these types of costs to obtain an accurate figure of the resources used and the total expenditure incurred in producing a given quantity of goods or services. This calculation provides important insights for businesses regarding pricing, profitability, and overall financial health. In contrast, subtracting variable costs from fixed costs would not provide a meaningful figure related to production costs. Similarly, calculating average costs multiplied by output gives a similar result to total costs but does so without directly addressing the separate contributions of fixed and variable costs, while dividing variable costs by output does not yield any useful financial insight in the context of total cost calculation.