Question

Consider a firm making production decisions in the short run. Select the statement or statements that's correct.

A. Average variable cost cannot decline with output, at any level of output.

B. Average total cost cannot decline as output increases, at any level of output.

C. Average fixed cost cannot increase with output, at any level of output.

D. Average variable cost is always above the average fixed cost.

E. Average total cost will always exceed average variable cost.

Answer 1

Answer:

Statement C and E are correct.

Explanation:

C. Average fixed cost is Total fixed cost/Quantity produced. Total fixed cost is fixed in short run. So, with increase in quantity average fixed cost will always decrease.

E. Average total cost is addition of average variable cost and average fixed cost therefore it is always greater than average variable cost.

Average variable cost and average total cost initially decrease with increase in output.

In the starting stage of production with less quantity Average fixed cost can be higher than average variable cost because average variable cost is Total variable cost/Quantity where total variable cost increases with increase in Quantity but total fixed cost remains same and with low quantity average fixed cost is high.