Question

1)Which of the following statements is​ true?

A.

Average fixed cost equals total fixed cost divided by total output.

B.

Average total cost always falls as output increases.

C.

Average fixed cost equals average total cost plus average variable cost.

D.

Average variable cost is always greater than average fixed cost.

2) As output​ increases, average fixed cost

A.

remains constant.

B.

always decreases.

C.

​decreases, then increases.

D.

​increases, then decreases.

3) Average total cost minus average variable cost​ ________ as output increases because​ ________ as output increases.

A.

​decreases; economies of scale are present

B.

​decreases; average fixed cost decreases

C.

​decreases; marginal returns diminish

D.

decreases and then​ increases; marginal cost initially decreases and then increases

4) Average variable cost is equal to

A.

average total cost minus average fixed cost.

B.

the change in total cost divided by the change in quantity.

C.

average total cost multiplied by quantity.

D.

total cost divided by quantity.

5) The average total cost curve eventually slopes upwards because of the

A.

law of diminishing returns.

B.

decrease in labor costs.

C.

increase in capital costs.

D.

reductions in average fixed costs.

Answer 1

Ques1: Statement 1 is true as the Average Fixed Cost (AFC) is the fixed cost per unit of output.

AFC = TFC/Q where TFC is the total fixed cost and Q is the quantity.

Ques2: Option B is correct. Average Fixed Cost (AFC) is the fixed cost per unit. It is calculated by dividing total fixed cost by the total level of output. Since we know Total Fixed Cost does not vary with the output. It always remains constant. Therefore, as we increase the level of output per unit fixed cost which AFC will decline.

Ques3: Option C is correct. Since, Total Fixed Cost remains fixed throughout the level of output, the Average Fixed Cost decline as we keep on increasing the level of output. Since the average total cost or average cost is the sum total fo average fixed cost and average variable cost. The difference between AC and AVC will decrease as we increase the level of output. This is because of diminishing marginal returns to the labor which means as we increase the level of output along with some fixed factor and variable factor, the output will decrease as we keep on hiring more and more units of the variable factor. Since cost and output have an inverse relationship as we increase output less and less will be added to total output and cost will start rising. Hence Option C is correct.

Ques4: Average Variable cost is the variable cost per unit of output which is calculated as the difference between Average Cost and Average Fixed Cost. Hence, Option A is correct.

Ques5: Option A is correct. AC slopes upwards due to the law of diminishing returns. Due to the inverse relationship between cost and output. As we increase the variable input in the production process because of the law of diminishing returns less and less will be added to the total output and after a point of time, it will start falling. It means the marginal output will decline as a result Marginal cost will rise and since TC is sum total of marginal Cost Average cost will also start rising.