As the level of output increases, what happens to the average fixed cost of a firm?

Average Fixed Cost (AFC) is calculated by dividing the total fixed cost (FC) by the quantity of output (Q).

Fixed costs are expenses that do not change regardless of the level of production. For example, rent for a factory building remains the same whether the factory produces 1 unit or 1000 units.

If the total fixed cost (FC) remains constant, and the quantity of output (Q) increases, the denominator in the AFC formula gets larger. When a constant number (FC) is divided by an increasingly larger number (Q), the result (AFC) will decrease.

For example, if Fixed Cost = N100:

• If Output = 1 unit, AFC = N100/1 = N100
• If Output = 10 units, AFC = N100/10 = N10
• If Output = 100 units, AFC = N100/100 = N1

As output increases, the average fixed cost continues to decrease.

Based on the analysis, as the level of output increases, the average fixed cost of a firm will continue to decrease.

The final answer is $\text{B) continue to decrease}$.