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Variable cost plus fixed costs equal total costs.

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Variable cost plus fixed costs equal total costs. Why would a firm sell its products as long as the revenue covers the variable costs? What are sunk costs? If Marginal Cost is close to zero, why would a company give away many units? What are some examples of products that have close to zero marginal cost? Why is it important to know the various costs of a product?

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Solution Summary

This solution goes over the different types of costs within the context of business management.

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First we discuss sunk costs.

Sunk costs are costs that are the firm cannot recover regardless of its decision whether to produce or not. Long term costs are generally sunk costs (such as renting the factory).

Because sunk costs cannot be recovered, they are not considered in short term decision making. In short run, only the variable cost is considered. For example, if I own a factory, and my fixed ...

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