Answer to Question #298155 in Microeconomics for neha

Question

If the total cost is positive at zero level of output, what does it signify?

Answer 1

If the total cost is positive at zero level of output, what does it signify?

It signifies there is the presence of fixed cost and the absence of variable cost.

Total cost is given by: Total cost = Fixed cost + variable cost.

The concept "fixed cost" refers to a cost in production that does not fluctuate when the number of goods or services produced or sold increases or decreases. Even when output is zero, fixed costs remain constant. Fixed costs are expenses that must be paid by a firm regardless of its specific business operations. This indicates that fixed costs are often indirect, in the sense that they do not apply to the creation of goods or services by a firm.

When the output is zero, the variable cost is also zero. Variable costs are those that vary according to the quantity of output.

In the above equation, a positive value of total cost can only be achieved if the fixed cost is positive given that the variable cost is zero (since there is no production at that level).