Fixed costs of working act like

Question

Quizplus · Accepted Answer

Fixed costs are costs that do not vary with the level of production, such as rent or loan payments. Since fixed costs do not change with output, they cannot affect the substitution effect (the change in quantity demanded due to a change in the relative prices of goods) but they do affect the income effect (the change in quantity demanded due to a change in purchasing power). As fixed costs represent a constant outflow of financial resources, they affect the consumer's overall budget constraint and reduce their purchasing power, thus reducing the quantity demanded. Therefore, fixed costs act like a pure income effect.

Fixed Costs of Working Act Like