aFinal answer:
The average fixed cost curve is a downward-sloping curve depicting that as output increases, the average fixed cost per unit decreases due to the spreading of the overhead across more units.
Step-by-step explanation:
The average fixed cost is calculated by dividing the total fixed cost by the quantity of output produced. When the fixed cost is $1,000, to understand the curve for average fixed cost, you must note that as the quantity of output increases, the average fixed cost decreases, because the same amount of fixed cost is spread over more units of output. This phenomenon is known as spreading the overhead. The more units produced, the lower the average fixed cost per unit becomes, reflecting the spread of overhead costs across an increasing number of units.
Graphically, the average fixed cost curve is a downward-sloping curve that approaches but never touches the horizontal axis. This indicates that average fixed cost gets smaller as output increases but never becomes zero since there is always some fixed cost to be allocated, no matter how many units are produced.
Spreading the overhead refers to the allocation of fixed costs over a larger number of units as production increases. For businesses, it is beneficial to increase the quantity of output to reduce the average fixed cost per unit, thereby becoming more cost-efficient. This practice improves a firm's competitive edge and profitability in the market.