A Level Economics AQA Practice Exam

Which of the following best describes fixed costs?

1. Costs that vary with output

2. Costs that do not change regardless of output

3. Costs that change occasionally

4. Costs that increase as output decreases

The correct answer is: Costs that do not change regardless of output

Fixed costs are expenses that do not fluctuate with the level of production or sales within a certain range. This means that regardless of how much is produced, these costs remain constant—examples include rent, salaries of permanent staff, and equipment leases. In contrast to variable costs, which change in direct relation to output levels, fixed costs are incurred even when production is at zero. This characteristic of fixed costs is crucial for businesses in understanding their financial commitments and in managing budgeting and pricing strategies. By recognizing that these costs are stable, firms can better assess their break-even point and make informed decisions about scaling production or altering pricing. The other options represent misconceptions about fixed costs; for instance, costs that vary with output describe variable costs, while those that change occasionally or increase as output decreases do not accurately capture the nature of fixed costs.