Question

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

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

Hint:

AFC falls continuously as output increases because fixed cost is divided by more units. Its curve is a rectangular hyperbola.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Average Fixed Cost ($AFC$) is the total fixed cost ($TFC$) divided by the quantity of output produced ($Q$).
Step 2: Detailed Explanation:
Formula: $AFC = \frac{TFC}{Q}$.
1. Since $TFC$ is a constant positive value, as $Q$ increases, the $AFC$ must continuously fall.
2. However, $AFC$ can never be zero because $TFC$ is never zero. The curve approaches the axes but never touches them.
3. A mathematical property of this curve is that $AFC \times Q = TFC$. This means the area under the curve is constant at every point.
4. In geometry, a curve where the product of $X$ and $Y$ values is constant is called a Rectangular Hyperbola.
Step 3: Final Answer:
The shape of the AFC curve is a rectangular hyperbola.