CFA Practice Question

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CFA Practice Question

A firm's variable costs ______

A. directly reflect the price of the company's outputs.
B. are dependent upon the level of fixed costs in the long run.
C. are always equal to the company's total average costs in the long run.
D. are determined by the quantity of output it produces.
E. decrease as output increases.
Correct Answer: D

Variable costs are the costs that vary as output changes.

User Contributed Comments 5

User Comment
bahodir What about answer A? Is it wrong?
ljamieson A is wrong because price of an output is determined by the market. It is external to the cost of production.
mikeburns E is correct, but only in the short run -- in the long run, variable costs increase due to law of diminishing returns
granbois No the variable cost is not supposed to change - by definition.
ascruggs92 Mikeburns, that's false it's not about short term or long run, it's about quantity produced, and VC increases or decreases depending on the current level of production. In the long run, all costs are variable.

granbois, you're thinking of fixed costs, hence the name "fixed." Variable costs can and always do change
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