Question

Which of the following statements is not true about the average fixed cost (AFC) of the milk production?

• A. AFC varies for each level of output
• B. AFC continues to decline with increase in output level
• C. AFC is equal to total fixed cost when output is zero
• D. AFC can be negative beyond a certain point of investment in dairy farming

Hint:

The continuous decline of average fixed cost as output increases is the principle behind "spreading the overhead," which is a key driver of economies of scale in dairy farming.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
In production economics, average fixed cost (AFC) is the fixed cost per unit of output produced.
Key Formula or Approach:
The formula for average fixed cost is:
\[ \text{AFC} = \frac{\text{Total Fixed Cost (TFC)}}{\text{Output Quantity (Q)}} \]

Step 2: Detailed Explanation:
Let us analyze the behavior of average fixed cost:
- Total Fixed Cost (TFC) represents expenses that do not change with the level of output (such as land rent, buildings, and machinery depreciation). TFC is always a positive constant:
\[ \text{TFC} > 0 \]
- Output quantity (Q) represents physical production (such as liters of milk) and is always a non-negative value:
\[ Q \ge 0 \]
Let us evaluate each option:
- Option A is true: Because Q changes while TFC remains constant, the ratio \(\text{TFC}/Q\) will vary for every level of output.
- Option B is true: As the output level (Q) increases, the constant TFC is spread over more units, causing the AFC to decline continuously.
This mathematical property is represented as a rectangular hyperbola on a cost curve graph.
- Option C is mathematically undefined, but in simple economic terms, if $Q=0$, TFC remains constant.
- Option D is not true: Because both TFC and Q are always positive values, their ratio \(\text{TFC}/Q\) can never be negative.
Regardless of the level of investment or production, the average fixed cost will approach zero but will never become negative.

Step 3: Final Answer:
The incorrect statement is represented by option (D).