CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production
A bakery in Pune pays a fixed monthly rent of Rs 20,000 for its shop. Whether it bakes 500 loaves or 5,000 loaves in the month, the rent does not change. In economic terms, this rent is best described as:
The rent is a fixed cost because it remains Rs 20,000 whatever the output level in the short run. Variable costs change with output, and marginal cost relates to the extra cost of one more unit, so neither describes this rent.
- AA variable cost
- BA fixed costCorrect
- CA marginal cost
- DAn average variable cost
Explanation
Costs that do not change with the level of output in the short run are fixed costs. The rent stays at Rs 20,000 irrespective of loaves baked, so it is fixed. Variable costs, by contrast, rise or fall with output.
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