Read the following statements - Assertion (A) and Reason (R):
Assertion: In the short run, when we change the level of output, whatever change occurs to total cost is entirely due to the change in total variable cost.
Reasoning: In the short run, fixed cost cannot be changed.
From the given alternatives choose the correct one:
Answer & explanation
Correct answer: option 4
The correct answer is option 4: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Explanation:
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Assertion (A): In the short run, when we change the level of output, whatever change occurs to total cost is entirely due to the change in total variable cost. (True)
- In the short run, Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC).
- Since TFC remains constant, any change in TC is entirely due to changes in TVC.
- This means that when output changes, the increase or decrease in TC is only because of TVC.
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Reason (R): In the short run, fixed cost cannot be changed. (True)
- Fixed costs (TFC) do not change in the short run, regardless of the level of output.
- Even if a firm produces more or less, TFC remains constant (e.g., rent, salaries of permanent staff).
- The reasoning directly explains the assertion.