Question

As output increases, average total cost and average variable cost get closer to each other because:

	A.	marginal cost increases.
	B.	marginal cost equals average total cost at its minimum.
	C.	marginal cost equals average variable cost at its minimum.
	D.	average fixed cost declines.

Answer 1

Option D. average fixed cost declines

TC = TVC + TFC, where TC is total cost, TVC is Total Variable Cost and TFC is Total Fixed Cost.

Dividing both sides by Q, we get their averages -

TC/Q = TVC/Q + TFC/Q

ATC = AVC + AFC,

Note that AFC = TFC/Q where TFC is fixed number. As Q will tend to infinity, AFC will tend to 0. Hence, as output increases, average fixed cost declines. and  average total cost and average variable cost get closer to each other.