As a movie exhibitor, you can choose between paying a flat fee of $5000 to show a movie for a week, or paying a fee of $2 per customer. Will your choice affect your fixed and variable cost? How so?

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If the cost of showing the movie is your only cost, then your choice in this matter is a choice between having all fixed costs and no variable costs or having only variable costs and no fixed costs. In real life, a movie theater would have all sorts of other costs. In that case, this decision would change the ratio of fixed and variable costs.

If you pay the flat fee, you are incurring more fixed costs and you are not incurring any variable costs. You must pay the $5000, regardless of how many or how few people come to see the movie. This is a fixed cost. If the fee for the movie is your only cost, you will have only fixed costs. If you pay $2 per customer, you are incurring more variable costs and you are not incurring any fixed costs. That is because your costs depend completely on how many people come to see the movie.

More realistically, you will have many other costs. You will have costs for ticket takers and popcorn sellers and electricity, among other things. If you pick the flat fee, your fixed costs will rise relative to your variable costs. If you pick the $2 per head fee, your variable costs will rise relative to your fixed costs.

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