Question

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

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

Hint:

Remember:

• AFC decreases continuously as output increases
• Shape of AFC curve: \[ \text{Rectangular Hyperbola} \]
• Fixed cost spreads over more units of output

Answer 1

The Correct Option is B

Concept: Average Fixed Cost (AFC) is the fixed cost per unit of output. It is calculated as: \[ AFC = \frac{TFC}{Q} \] where: \[ TFC = \text{Total Fixed Cost} \] and \[ Q = \text{Quantity of output} \]

Step 1: Understand the behavior of fixed cost. Fixed cost remains constant irrespective of output. Thus: \[ TFC = \text{Constant} \]

Step 2: Analyze what happens when output increases. As: \[ Q \uparrow \] Average fixed cost: \[ AFC = \frac{TFC}{Q} \] keeps decreasing. However, it never becomes zero.

Step 3: Identify the shape of the curve. The AFC curve:

• Slopes downward continuously
• Approaches both axes but never touches them

Such a curve is called a: \[ \text{Rectangular Hyperbola} \] Therefore, the correct answer is: \[ \boxed{\text{Rectangular hyperbola}} \]