Question 16
Theory of Costs and RevenueThe basic relationship between the cost of production and the market price of any commodity in the short run is that the market price
- A.always reflects the cost of labour
- B.reflects the variable, but not the fixed cost of production
- C.does not rise above variable costs
- D.is determined by the cost of production and the current rate of inflation
Show the answer and explanation
Answer: B (reflects the variable, but not the fixed cost of production)
Explanation
In the short run a firm stays in business if price covers its variable costs; fixed costs must be paid anyway, so price need not cover them.