This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
Step 1: Define Average Fixed Cost (AFC). Average Fixed Cost (AFC) is calculated by dividing the total fixed cost (FC) by the quantity of output (Q). AFC = FCQ Step 2: Understand the nature of Fixed Cost. 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. Step 3: Analyze the effect of increasing output on AFC. 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. Step 4: Select the correct option. 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 B) continue to decrease. Last free one today — make it count tomorrow, or type /upgrade for unlimited.