Chapter P3, Problem 1.1BC

To determine

Whether human-based or Robotic system will have high fixed cost and which will have high variable cost.

Explanation of Solution

Firms using robotic-based system will have to purchase these robots in outright manner. Even though such robots can be resold but such re-sale takes time. So, it would be difficult for the firm to change in quantity of robots in short-period of time as it output changes. In other words, quantity of robots will remain fixed in short-run whatever be the level of output during such period.

When quantity of certain factors remain fixed irrespective of the output produced, such factors are termed as fixed factors and cost associated with such factors is referred to as fixed cost.

On the other hand, in case of human - based system, firms can easily hire or laid-off workers as it experiences the change in output.

When quantity of factors can be adjusted with change in output, such factors are termed as variable factors and cost associated with such factors is referred to as variable costs.

Thus, robotic-based system being underlined by fixed factors will have a higher fixed cost while human-based system being underlined by variable factors will have a higher variable cost.

Economics Concept Introduction

Concept Introduction:

Fixed Cost is the cost incurred by a firm even when output is zero.

Variable cost is the cost incurred which varies with output.