Microeconomics Assignment: Analyzing Costs in Short Run and Long Run

This microeconomics assignment delves into the concepts of fixed and variable costs. The assignment distinguishes between these costs, explaining how they behave in the short and long run. It provides a detailed analysis of these costs, including their impact on production and the factors that influence them. The assignment also includes a practical application of these concepts to real-world scenarios, such as the costs associated with owning and operating an automobile. It explores which costs are fixed, variable, and how they change with increased output or mileage. The assignment references key economic texts and provides a comprehensive understanding of cost behavior in microeconomic contexts. The assignment provides a clear explanation of the differences between fixed and variable costs, and how these costs change in the short and long run. The assignment is contributed by a student to be published on the website Desklib, a platform which provides all the necessary AI based study tools for students.

Running head: MICROECONOMICS
Microeconomics
Name of the Student:
Name of the University:
Author’s Note:

1MICROECONOMICS
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................3
References..................................................................................................................................4

2MICROECONOMICS
Answer to question 1:
Fixed costs are those expenses which do not depends on the output or the volume of
production rather it depends on time period. It remains fixed for a certain level of output and
then it has to be increased for increase in output. On the other hand, the variable costs are
those expenses which directly depend on the output or the volume of production. It increases
or decreases proportionately with the increase or decrease in output. In the short run period
the amount of fixed costs remains unchanged as the production volume cannot be changed
within a very shorter period of time. Hence, the distinction between the fixed and variable
costs can only be made properly in the short run (Baumol and Blinder 2015).
Classification of costs:
Advertising expenditure Fixed costs
Fuel Fixed costs
Interest on company issued bonds Fixed costs
Shipping charges Variable costs
Payments for raw materials Variable costs
Real estate taxes Fixed costs
Executive salaries Fixed costs
Insurance premium Fixed costs
Wage payments Variable costs
Depreciation and obsolescence charges Fixed costs

3MICROECONOMICS
Sales taxes Variable costs
Rental payments on leased office machinery Fixed costs
In the long run period, with the change in production volume beyond a certain level
causes increase in both the fixed as well as in the variable costs. Hence, in the long run period
the fixed costs are also variable in nature. Therefore, it can be said that in the long run there
are no fixed costs and all the costs are variable in nature.
Answer to question 2:
Some fixed and variable costs associated with the owning and operating an
automobile can be listed as follows.
Fuel expenses Variable costs
Maintenance expense Fixed costs
Driver’s salaries Fixed costs
Road taxes Fixed costs
Insurance expenses Fixed costs
Depreciation Fixed costs
For flying 1,000 miles extra for a spring break, the variable costs must be considered
with due care as there will be no impact on the fixed costs for such extra run of the
automobile, and also some implicit costs such as depreciation will be relevant to this decision
(Varian 2014).

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5MICROECONOMICS
References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Varian, H.R., 2014. Intermediate microeconomics with calculus: a modern approach. WW
Norton & Company.