Question

The average fixed cost curve __________________ as quantity produced increases.

a. First falls to a minimum, and then rises.
b. First rises to a maximum, and then falls.
c. Continuously decreases.
d. Continuously increases.

Answer 1

The average fixed cost curve continuously decreases as the quantity produced increases because fixed costs are spread over more units, leading to a lower fixed cost per unit. Thus, the option "C" is the correct answer.

Step-by-step explanation:

The average fixed cost curve continuously decreases as the quantity produced increases. When zero production occurs, the fixed costs, such as the initial $160 mentioned, are still present; these are costs that do not vary with the level of output and are represented as the vertical intercept of the total cost curve. As production commences and increases, variable costs are added to the fixed costs to determine the total cost. However, the average fixed cost, which is the fixed cost divided by the quantity produced, will decrease as the quantity increases, because the same fixed costs are being spread over a growing number of units.

Consider the context of a constant-cost industry; an increase in demand that is met by an equal increase in supply will keep the equilibrium price the same even as the quantity sold increases. But if we examine the average fixed costs specifically, as more units are produced, the fixed cost per unit falls, showcasing economies of scale in the production process.