Average Fixed Cost (AFC) curve is:
Options
AU shaped
BS shaped
CRectangular Hyperbola
DStraight line
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Theory of Production and CostPYQ - Dec 2021Question 49 of 20
All Questions Correct Answer
✅ Option c — Rectangular Hyperbola
All Options:
- AU shaped
- BS shaped
- CRectangular Hyperbola
- DStraight line
Detailed Solution & Explanation
To understand the shape of the Average Fixed Cost (AFC) curve, we need to consider its definition and behavior.
• The Average Fixed Cost is calculated by dividing the total fixed cost by the quantity of output produced.
• Since the total fixed cost remains the same regardless of the quantity produced, the AFC will decrease as the quantity of output increases.
• This is because the same fixed cost is spread over a larger quantity of output, resulting in a lower average fixed cost per unit.
• As the quantity of output approaches zero, the AFC will approach infinity, because the fixed cost is being divided by a very small number.
• This behavior is characteristic of a rectangular hyperbola, where the product of the variables (in this case, AFC and quantity) is constant.
The correct answer is based on the definition of AFC and its behavior as output changes.
• Option A, U shaped, is incorrect because it does not accurately describe the behavior of AFC as output increases.
• Option D, Straight line, is also incorrect because AFC does not remain constant as output changes.
About This Chapter: Theory of Production and Cost
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Function, Cost Concepts (Short/Long Run)
This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.
View Official ICAI SyllabusExam Strategy Tip
The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.
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