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.
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