A firm's cost per unit of output is not necessarily fixed; it can change as the level of production increases or decreases. This provides a more realistic model of production costs compared to simpler scenarios that assume unit costs are constant regardless of scale.

Variable Unit Costs

For the Beautiful Cars company, variable costs are expenses like wages, raw materials, and equipment that rise as production increases. The model assumes these costs are directly proportional to the number of cars (Q) produced, with a constant cost per car (c) of \$14,400. This means each additional car adds \$14,400 to the total variable cost.

Variable Costs for Beautiful Cars (c = $14,400/car)

Variable costs are production expenses that change directly with the quantity of units produced. As a firm increases its output, it requires more variable inputs—such as wages, raw materials, and equipment—which causes the total variable costs to rise.

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A firm's production expenses are typically categorized into two types: fixed costs, which are independent of the production level, and variable costs, which change with the quantity of output.

Fixed vs. Variable Costs

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

Fixed costs are production expenses that a firm must pay regardless of its output level. These costs, such as research and development (R&D) or factory-related expenses like rental payments or the opportunity cost of invested capital, remain constant whether the firm produces many units or none at all.

Fixed Costs

Variable Costs

For a firm with fixed costs of production, a key problem is to analyze the relationship between its average cost (AC) and marginal cost (MC). This analysis requires understanding how the presence of fixed costs influences the shape of the average cost curve and its position relative to the marginal cost curve at various output levels. [1, 3]

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