A Level Economics AQA Practice Exam

What characterizes a variable cost?

1. A cost that remains constant regardless of output

2. A cost that varies with changes in the level of output

3. A cost that is always incurred

4. A cost that is the same for all firms regardless of their output

The correct answer is: A cost that varies with changes in the level of output

A variable cost is characterized by its direct relationship with the level of output produced. This means that as production increases, the total variable cost also increases, and vice versa. Examples of variable costs include costs of raw materials, labor directly tied to production, and utility costs that fluctuate based on usage. By nature, variable costs change in proportion to the volume of goods or services produced. For instance, if a factory produces 100 units in a month, the costs associated with materials for those 100 units represent variable costs. If production increases to 200 units, the costs associated with the additional materials needed for those new units will increase the total variable costs accordingly. Thus, the essence of variable costs is their dependency on the level of output, making option B the correct choice. This contrasts with fixed costs, which remain constant regardless of output levels, and options that describe costs as always being incurred or uniform across firms are inherently incorrect when defining variable costs specifically.