When total fixed costs increase, select one: a. the profit-maximizing level of output falls. b. the firm may be forced to shut down if total fixed costs get too high. c. economic profit decreases. d. both a and b

b

Explanation:

The fixed costs are costs that do not change when the quantity of output changes. Unlike variable costs, which change with the amount of output, fixed costs are not zero when production is zero. Some examples of fixed costs include rent, insurance premiums, or loan payments. Fixed costs can create economies of scale, which are reductions in per-unit costs through an increase in production volume. This idea is also referred to as diminishing marginal cost.

A company with a relatively large amount of variable costs may exhibit more predictable per-unit profit margins than a company with a relatively large amount of fixed costs. This means that if a firm has a large amount of fixed costs, profit margins can really get squeezed when sales fall, which adds a level of risk to the stocks of these companies.

Conversely, the same high-fixed-costs company will experience magnification of profits because any revenue increases are applied across a constant cost level. Thus, as you can see in the example, fixed costs are an important part of profit projections and the calculation of break-even points for a business or project.

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