Question

A common name for fixed cost is "overhead." If you divide fixed cost by the quantity of output produced, you get average fixed cost. Suppose fixed cost is $1,000. What does the average fixed cost curve look like? Use your response to explain what "spreading the overhead" means.

a. The curve is upward sloping; Spreading the overhead means reducing fixed costs
b. The curve is downward sloping; Spreading the overhead means increasing fixed costs
c. The curve is horizontal; Spreading the overhead means sharing fixed costs among units of output
d. The curve is vertical; Spreading the overhead means incurring variable costs

Answer 1

The average fixed cost curve is downward sloping, representing that as production quantity increases, the fixed cost per unit decreases. 'Spreading the overhead' means distributing the fixed cost over more output units, which reduces the average fixed cost per unit.

Step-by-step explanation:

A common name for fixed cost is "overhead." When this fixed cost is divided by the quantity of output produced, the result is the average fixed cost. If the fixed cost is $1,000, the average fixed cost curve will be downward sloping. This is because, as the quantity of output increases, the fixed cost of $1,000 is spread out over more units, causing the average fixed cost per unit to decrease.

What "spreading the overhead" means is essentially distributing the fixed costs across a greater number of output units. This sharing lowers the cost per unit as production volume goes up. Hence, the correct characterization of the curve is option (b) - the curve is downward sloping; Spreading the overhead means increasing fixed costs.