As production increases, which statement about average fixed cost is true?

• A. AFC decreases
• B. AFC increases
• C. AFC remains constant
• D. AFC equals marginal cost

Answer: (A)

The main idea is how fixed costs are allocated as output changes. Fixed costs stay the same no matter how much is produced, so spreading that constant amount over more units lowers the fixed cost per unit. That's why average fixed cost is AFC = total fixed cost divided by quantity, and as quantity rises, AFC falls. For example, with a fixed cost of 100, producing 50 units gives AFC of 2 per unit, while producing 100 units makes AFC 1 per unit. This continual spreading means AFC can get very small as output grows, approaching zero in the limit. The statement that AFC increases, remains constant, or equals marginal cost conflicts with these facts: fixed costs don’t rise with production, don’t stay the same per unit when output changes, and AFC is not the same as marginal cost, which is the cost of producing one more unit.