The AVC and AFC of a firm at some levels of output are given below:
| Output (units) | 4 | 5 | 6 | 7 |
|---|---|---|---|---|
| AVC (Rs) | 7 | 6.5 | 6.8 | 7.4 |
| AFC (Rs) | 5 | 4 | 3.33 | 2.86 |
Consider the following statements:
(A) AVC starts rising after 5 units of output.
(B) SAC falls from 5 to 6 units, because the fall in AFC is larger than the rise in AVC.
(C) SAC starts rising as soon as AVC starts rising.
(D) Among these levels, SAC is the lowest at 6 units of output.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (D) only
SAC = AVC + AFC. Add the two rows first.
\( \displaystyle 4: 7 + 5 = 12 \)
\( \displaystyle 5: 6.5 + 4 = 10.5 \)
\( \displaystyle 6: 6.8 + 3.33 = 10.13 \)
\( \displaystyle 7: 7.4 + 2.86 = 10.26 \)
(A) AVC starts rising after 5 units of output. — Correct. AVC falls to 6.5 at 5 units and then rises to 6.8.
(B) SAC falls from 5 to 6 units, because the fall in AFC is larger than the rise in AVC. — Correct. From 5 to 6 units, AFC falls by 0.67 while AVC rises by only 0.3, so SAC falls from 10.5 to 10.13.
(C) SAC starts rising as soon as AVC starts rising. — Incorrect. AVC rises after 5 units, but SAC goes on falling till 6 units. SAC rises only when the rise in AVC is larger than the fall in AFC.
(D) Among these levels, SAC is the lowest at 6 units of output. — Correct. SAC is 10.13 at 6 units, the lowest of the four values.
NCERT (2026-27): “Shapes of the Short Run Cost Curves … Let us now look at SAC. SAC is the sum of AVC and AFC. Initially, both AVC and AFC decrease as output increases. Therefore, SAC initially falls. After a certain level of output production, AVC starts rising, but AFC continuous to fall. Initially the fall in AFC is greater than the rise in AVC and SAC is still falling. But, after a certain level of production, rise in AVC becomes larger than the fall in AFC. From this point onwards, SAC is rising. …” |