Final answer:
Fixed costs are expenses that remain constant within the relevant range of production. When divided by output quantity, they generate the average fixed cost curve, which depicts the 'spreading the overhead' concept, reducing the average cost per unit with increased production.
Step-by-step explanation:
True. Over the relevant range of output, fixed costs remain unchanged. These are the expenses that do not vary with the level of production or sales and include items like rent, salaries, and insurance. For example, a factory's monthly lease payment is considered a fixed cost because it is the same amount regardless of how much product the factory produces that month.
When we discuss average fixed cost, we are referring to the fixed cost divided by the quantity of output produced. Suppose the fixed cost is $1,000, the average fixed cost curve would be a hyperbola, starting at a high value when the quantity of output is low and decreasing as more output is produced. This depicts the concept of spreading the overhead, which means that as production increases, the same amount of fixed cost is distributed over a larger number of units, lowering the cost per unit.