Economics Help !

[Turbo93]

Can anyone brighten this question for me ?

As output increases, what happens to the average fixed cost of production?
A It falls continuously.
B It falls and then rises.
C It remains constant.
D It rises and then falls.

And the answer for this question is A but dont understand why?

 

[whatsmyname]

the average fixed cost of production = (Total Fixed cost of Production) / No. Of Units Produced

this is an indirect question of the break-even analysis used in accounting and business studies..modified to fit eco standards. first what u nid to understand is the Limitations of break even:
Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
It assumes that fixed costs (FC) are constant. Although, this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.
It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e. linearity)
It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period).
In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

The Break-even Analysis depends on three key assumptions:
1.Average per-unit sales price (per-unit revenue)
2.Average per-unit cost
2.Total fixed costs

then see these figures
http://static2.tsrfiles.co.uk/w/images/ ... _chart.JPG
http://static2.tsrfiles.co.uk/w/images/ ... _chart.JPG

and now make the conclusion that FC is always considered to be constant. so the ans to your question:
if its the short run: AFC decreases as FC is constant and the output increases the fraction tfc/output decreses.
if its the long run: the AFC may very well rise because the TFC itself increases, and at a rate faster than output.

Generally in economis these kind of questions are in the short run, and so the ans is A. u can tell that the output increment makes the FC borne by per unit output decrease, so AFC is decreasing continuously. An example mite help:
TFC = $100
output = 50 or 60
AFC = $2per unit or $1.67 per unit.