Which one of the following is a variable cost in the short run ?

Question

Accepted Answer

In the context of short-run production costs, a variable cost is one that changes with the level of output. Let's examine why Option 2, "Cost of raw materials," is the correct answer and why the other options are not considered variable costs in the short run.

1. **Option 2: Cost of raw materials (Correct Answer)**
   - **Explanation:** The cost of raw materials is a classic example of a variable cost. This is because the amount of raw materials required typically increases as production increases. For instance, if a factory produces more units of a product, it will need more raw materials, thus increasing the total cost. Conversely, if production decreases, the cost of raw materials will also decrease. This direct relationship with the level of output is what characterizes raw materials as a variable cost.

2. **Option 1: Payment of rent on building**
   - **Explanation:** Rent is generally considered a fixed cost in the short run. This is because the payment for rent does not change with the level of production. Whether a company produces a large number of goods or none at all, the rent for the building remains constant. Therefore, it does not qualify as a variable cost.

3. **Option 3: Cost of equipment**
   - **Explanation:** The cost of equipment is also a fixed cost in the short run. Equipment is a capital investment, and its cost is incurred regardless of the level of production. Once purchased, the cost of equipment does not fluctuate with changes in output, making it a fixed cost rather than a variable one.

4. **Option 4: Interest payment on borrowings**
   - **Explanation:** Interest payments on borrowings are typically fixed costs in the short run. These payments are predetermined and do not vary with the level of production. The interest rate and the amount borrowed determine the interest payments, which remain constant regardless of how much is produced.

In summary, the cost of raw materials is the only option that varies directly with the level of production, making it the correct choice for a variable cost in the short run. The other options are fixed costs, as they do not change with production levels.