Read the passage carefully and answer the questions based on the passage:

Short run Costs

In the short run, some of the factors of production cannot be varied. The cost that a firm incurs to employ fixed inputs is called the total fixed cost. Whatever amount of output the firm produces, this cost remains fixed for the firm. To produce any required level of output, the firm, in the short run, can adjust only variable inputs. Accordingly, the cost that a firm incurs to employ these variable inputs is called the total variable cost. Adding the fixed and the variable costs, we get the total cost of a firm. In order to increase the production of output, the firm must employ more of the variable inputs. As a result, the total variable cost and total cost will increase. Therefore, as output increases, the total variable cost and total cost increase. Marginal cost is the increase in total variable cost due to an increase in production of one extra unit of output. For any level of output, the sum of marginal costs up to that level gives us the total variable cost at that level.

When the output is zero in the short run, which of the following costs are undefined?

AVC, AFC and MC.

The correct answer is Option (1) → AVC, AFC and MC.

In the short run, when output is zero:

1. Total Fixed Cost (TFC) is positive (fixed costs are incurred even if nothing is produced).

2. Total Variable Cost (TVC) is zero (no production, so no variable inputs used).

3. Total Cost (TC) = TFC + TVC = fixed cost only.

Now look at what’s undefined:

• Average Variable Cost (AVC) = TVC / Output  → 0 divided by 0 = undefined

• Average Fixed Cost (AFC) = TFC / Output  → positive number divided by 0 = undefined

• Marginal Cost (MC) = ΔTVC / ΔOutput  → No change in output yet, so MC is undefined at zero output.