Question

What is the shape of the Average Fixed Cost (AFC) curve?

• A. Upward sloping
• B. Rectangular hyperbola
• C. Vertical
• D. Horizontal

Hint:

AFC falls continuously as output increases because fixed cost is divided by more units. Its curve is a rectangular hyperbola.

Answer 1

The Correct Option is B

Concept:
Average Fixed Cost means fixed cost per unit of output. It is calculated by dividing total fixed cost by output. The formula is: \[ AFC = \frac{TFC}{Q} \] where, \[ AFC = \text{Average Fixed Cost} \] \[ TFC = \text{Total Fixed Cost} \] \[ Q = \text{Quantity of output} \]

Step 1: Understand total fixed cost.
Total Fixed Cost remains constant at all levels of output. Examples of fixed costs are: \[ \text{Rent, insurance, salary of permanent staff, fixed machinery cost} \] These costs do not change even when output changes.

Step 2: Use the AFC formula.
The formula of AFC is: \[ AFC = \frac{TFC}{Q} \] Since \(TFC\) is constant, AFC depends on output \(Q\). When output increases, the same fixed cost is divided among more units. Therefore, AFC decreases.

Step 3: Understand with an example.
Suppose: \[ TFC = ₹100 \] If output is \(10\) units: \[ AFC = \frac{100}{10} = ₹10 \] If output is \(20\) units: \[ AFC = \frac{100}{20} = ₹5 \] If output is \(50\) units: \[ AFC = \frac{100}{50} = ₹2 \] So, as output increases, AFC keeps falling.

Step 4: Shape of AFC curve.
The AFC curve slopes downward from left to right. It keeps falling as output increases. However, AFC never becomes zero because fixed cost is always positive. The curve gets closer and closer to both axes but does not touch them. Such a curve is called a rectangular hyperbola.

Step 5: Final conclusion.
Therefore, the shape of the Average Fixed Cost curve is: \[ \boxed{\text{Rectangular hyperbola}} \] Hence, the correct answer is: \[ \boxed{\text{(B)}} \]