Multiple Choice
The percentage of the total cost driver that is attributable to each product line is called a(n):
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10. The Costs of Production
Cost-Minimizing Combination of Labor and Capital
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Which of the following is true of average fixed cost when output increases?
A
Average fixed cost increases as output increases.
B
Average fixed cost first decreases, then increases as output increases.
C
Average fixed cost remains constant as output increases.
D
Average fixed cost decreases as output increases.
Verified step by step guidance1
Recall the definition of Average Fixed Cost (AFC), which is the fixed cost divided by the quantity of output produced: \(\text{AFC} = \frac{\text{Fixed Cost}}{Q}\).
Understand that fixed costs are costs that do not change with the level of output, meaning the numerator (Fixed Cost) remains constant regardless of \(Q\).
As output \(Q\) increases, the denominator in the AFC formula increases, while the numerator stays the same.
Since the numerator is constant and the denominator increases, the value of AFC must decrease as output increases.
Therefore, average fixed cost decreases continuously as output increases, illustrating the concept of spreading fixed costs over more units of output.
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