Chapter 10R, Problem 13MCQ

To determine

The correct option that defines the consequences on average fixed cost for rising output level in short-run.

Answer to Problem 13MCQ

Option b is correct.

Explanation of Solution

Explanation for correct option:

b.

If output level is increased in short run, then fixed cost remains constant. The average fixed cost is reduced in short run if output level is increased to an extent as the fixed cost contribution decline per unit. Therefore, option b is correct i.e. in short-run, fixed cost falls initially then rises after certain output level.

Explanation for incorrect options:

a.

The fixed cost remains similar in short-run. This means the fixed cost will be same for increasing output level to some extent. But the average fixed cost in short-run will reduce as fixed cost contribution will spread over more number of units produced. Therefore, option a is incorrect.

c.

In short-run, average fixed cost reduces up to certain level of output initially and later on it increases with the increased output level. In long-run, average fixed cost is variable as more machinery or equipments are required to produce desired level of output. Therefore, option c is incorrect.

d.

In short-run, the average fixed cost does not reduce continuously but falls up to certain level of output. Therefore, option d is incorrect.

e.

In short-run, the average fixed cost does not increase continuously but falls up to certain level of output. Therefore, option e is incorrect.

Economics Concept Introduction

Average total cost: Average total cost of production per unit is comprised of two cost components that is average fixed cost and average variable cost. In short-run, fixed cost of the production remains similar.