Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is the characteristic of costs in the long term?

  1. All costs are considered fixed

  2. Firms can adjust all factors of production

  3. Costs are not affected by technology

  4. Costs remain static over time

The correct answer is: Firms can adjust all factors of production

The correct choice highlights that in the long term, firms have the ability to adjust all factors of production, including labor, capital, and resources. This means that businesses can alter their production processes, update equipment, expand or reduce facilities, and change their workforce in response to varying market conditions or strategic goals. In the long run, organizations are not constrained by existing commitments or fixed costs that limit their operational flexibility, allowing them to optimize production and align it more effectively with demand. This contrasts with the short term, where certain costs may remain fixed due to existing contracts or physical capacities. Other choices do not accurately reflect the characteristics of long-term costs; for example, stating that all costs are fixed ignores the fact that firms can indeed change their cost structures and scale operations over time. Similarly, asserting that costs are not affected by technology overlooks the profound impact that technological advancements can have on production efficiency and cost reduction. Lastly, the idea that costs remain static over time fails to recognize that costs can fluctuate due to various external factors, including market dynamics and changes in resource availability.