Which of the following statement is incorrect in relation to cost function?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: As output increases, total variable cost increases but there is no change in total cost.
1️ Option 1 (Correct Statement):
- In the short run, a firm can only adjust variable inputs (such as labor and raw materials), while fixed inputs (such as capital and land) remain unchanged.
2️ Option 2 (Correct Statement):
- To increase output, a firm must employ more variable inputs like labor and raw materials, since fixed inputs remain constant in the short run.
3️ Option 3 (Incorrect Statement):
- Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC).
- As output increases, TVC increases, and since TC = TFC + TVC, TC must also increase.
- The claim that "there is no change in total cost" is incorrect because total cost does increase as variable costs increase.