Which statement about fixed and variable costs is true?

• A. Fixed costs vary with production, while variable costs stay constant.
• B. Variable costs do not affect total cost at all.
• C. Fixed costs do not vary with production in the short term, while variable costs do vary with output.
• D. Variable costs are always larger than fixed costs.

Answer: (C)

The concept being tested is how costs respond to production changes. Fixed costs stay the same in the short run regardless of output, while variable costs change in direct relation to how much you produce. This is why the statement that fixed costs do not vary with production in the short term, while variable costs do vary with output, is correct. It aligns with how total cost is formed: total cost = fixed costs + variable costs. For example, rent or insurance is typically fixed in the short term, while materials or direct labor rise as more units are produced. The other statements ignore this relationship: variable costs do affect total cost, and it isn’t universally true that variable costs are always larger than fixed costs.