Which of the following are true ?
a) Average Fixed Cost (AFC) may become zero at very high levels of output.
b) Shape of Total Cost (TC) is affected by shape of Total Variable cost (TVC).
c) Shape of AFC is called rectangular hyperbola.
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: b and c
Statement (a): Average Fixed Cost (AFC) may become zero at very high levels of output – False
- AFC = Total Fixed Cost (TFC) ÷ Output (Q)
- Since Total Fixed Cost (TFC) is a constant positive value, AFC can never become zero, no matter how large the output becomes.
- It keeps decreasing as output increases but never reaches zero.
Statement (b): Shape of Total Cost (TC) is affected by shape of Total Variable Cost (TVC) – True
- Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
- Since TFC is constant, the shape of TC depends on TVC.
- TVC increases as output increases, and TC follows the same shape but starts at the level of TFC.
Statement (c): Shape of AFC is called a rectangular hyperbola – True
- AFC = TFC ÷ Q
- As output increases, AFC declines continuously but never touches the x-axis.
- As the output increases the AFC decreases, and the total fixed cost is evenly spread among the produced units.
- This creates a rectangular hyperbola.