If a firm produces nothing, _____ costs are zero, and the firm will incur _____ costs.

Question

BlackTom AI · Accepted Answer

To tackle this question, I’ll parse the scenario and then evaluate each option.
First, consider the cost behavior when a firm produces nothing. Variable costs depend on output: if output is zero, variable costs are zero because no production activity imposes variable input costs. Fixed costs, on the other hand, do not depend on the level of production; they are incurred even if output is zero (such as rents, some salaries, and depreciation).
Now, let’s assess each choice one by one.
Option 1: 'opportunity; variable' – This suggests that producing nothing affects opportunity costs and variable costs in a way that is inconsistent with standard cost theory. Opportunity costs are always present as the value of the next best alternative foregone, but this does not capture the specific zero-output behavior of variable costs being zero while fixed costs remain. Therefore this option is incorrect.
Option 2: 'fixed and variable; no' – This is illogical in the context of producing nothing: we do incur fixed costs, so saying 'no' to incurring costs is false, and also it implies both fixed and variable costs are incurred, which misstates variable costs being zero at zero output. This option is incorrect.
Option 3: 'variable; fixed' – This aligns with the correct cost behavior: variable costs are zero when output is zero, and fixed costs are incurred regardless of output, hence fixed costs are incurred. This option accurately reflects the scenario.
Option 4: 'fixed; variable' – This would imply fixed costs first and then variable costs, which contradicts the idea that variable costs are zero at zero production. It also mislabels which type of cost is incurred when output is zero. This option is incorrect.
In summary, the only option that matches the standard cost structure at zero production is that variable costs are zero and fixed costs are incurred, i.e., 'variable; fixed'.

If a firm produces nothing, _ costs are zero, and the firm will incur _ costs.

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