Suppose that an industry has high fixed costs to enter but o

Suppose that an industry has high fixed costs to enter but, other than that, is competitive. Give an example of a firm with a high fixed cost and a firm with a low fixed cost. Give an example of a firm with low variable costs and a firm with high variable costs.

Solution

Fixed cost of a firm is the cost that the firm has to bear in spite of its production or not. It is the cost that the firm has to bear on a recurring basis. On the contrary variable cost of a firm is the cost that the firm has to bear only if it undergoes production and is not on a recurring basis always.

An example of a firm with a high fixed cost is a professional service firm say a professional salon on rent or lease in a modern society where a very high fixed rent needs to be paid out every month which is a high fixed component of the firm\'s cost.

An example of a firm with low fixed cost is a tax preparation firm where the business is relied more on people and less on other physical resources thus incurring low fixed costs.

An example of a firm with low variable costs is a firm that produces and sells softwares. In this case whether it sells one copy or ten million copies the cost remains basically unchanged with the variable component.

An example of a firm with high variable costs is a firm that pays its employees only for billable hours or as per the work provided then the firm incurs high variable costs and low fixed costs.