Which of the following statement (s) is/are correct?
Statement 1: Average fixed cost is independent of the amount of output produced and remains constant for all levels of production.
Statement 2: The TVC at a particular level of output is given by the area under the SMC curve up to that level.
Answer & explanation
Correct answer: option 2
The correct answer is option 2: Only Statement 2 is correct.
Statement 1: "Average fixed cost is independent of the amount of output produced and remains constant for all levels of production." Incorrect
- AFC (Average Fixed Cost) = TFC / Q
- Since TFC (Total Fixed Cost) is constant, AFC decreases as output (Q) increases.
- AFC is not constant; it declines as output increases and follows a rectangular hyperbola.
✔ Thus, this statement is incorrect.
Statement 2: "The TVC at a particular level of output is given by the area under the SMC curve up to that level." Correct
- Short-Run Marginal Cost (SMC) = ΔTVC / ΔQ
- TVC (Total Variable Cost) is obtained by summing all marginal costs (SMC) over different levels of output.
- Graphically, TVC is the area under the SMC curve up to that level of output.