Question

Average fixed cost curve

• A. is a straight line parallel to X-axis.
• B. is a straight line parallel to Y-axis.
• C. falls, as more units are produced.
• D. rises, as more units are produced.

Hint:

Think of it like sharing a pizza. The pizza (Total Fixed Cost) is of a fixed size. The more people (units of output) you share it with, the smaller each person's slice (Average Fixed Cost) becomes.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Average Fixed Cost (AFC) is the total fixed cost (TFC) per unit of output. Fixed costs are costs that do not change with the level of production (e.g., rent, machinery cost).

Step 2: Key Formula or Approach:
The formula for AFC is: \[ AFC = \frac{TFC}{Q} \] where \(TFC\) is Total Fixed Cost and \(Q\) is the quantity of output.

Step 3: Detailed Explanation:
In this formula, TFC is a constant value. As the quantity of output (\(Q\)) increases, this constant TFC is divided by a larger and larger number.
Consequently, the value of AFC continuously falls as more units are produced.
The AFC curve is a downward-sloping curve that gets closer and closer to the X-axis but never touches it. This shape is known as a rectangular hyperbola.
Therefore, the statement that the AFC curve "falls, as more units are produced" is correct.

Step 4: Final Answer:
Since AFC is calculated by dividing a constant TFC by an increasing quantity Q, its value continuously decreases. Thus, option (C) is the correct answer.