Final answer:
True, as production increases, the cost per unit associated with a fixed cost decreases due to economies of scale. Fixed costs, when allocated over a higher number of units, result in a lower cost per unit, allowing larger production facilities to operate at reduced average costs.
Step-by-step explanation:
The statement is true: as the production level increases, the cost per unit decreases for a fixed cost. This is due to the concept of economies of scale, where the average costs per unit of production drop as the volume of production increases. Fixed costs such as rent or salaries do not change with the level of output; therefore, when these costs are spread over a greater number of units, the cost per unit diminishes.
Fixed costs remain constant regardless of the quantity of output produced. Initially, with zero production, the fixed cost of $160 stands alone. As production begins and increases, variable costs are added to these fixed costs, creating the total cost. Consequently, when we divide the total fixed cost by the increasing number of produced units, the cost per unit attributable to fixed costs goes down.
For instance, if a factory incurs a fixed cost for monthly rent, regardless of the number of units produced, as it produces more, the rent cost allocated to each unit decreases, illustrating economies of scale. Hence, larger factories or businesses, like those of warehouse stores, benefit from lower average costs than smaller operations.