Fixed costs dilute per unit with rising output

Steps:

• Define key costs: fixed costs remain constant regardless of output; variable costs rise with output.
• Calculate averages: average fixed cost (AFC) = total fixed cost / output quantity.
• Analyze trend: as output increases, fixed cost spreads over more units, reducing AFC per unit.
• Compare to others: variable-based costs eventually rise due to diminishing returns.

Why A is correct:

• AFC = fixed cost / Q; by definition, fixed cost is constant, so AFC falls continuously as Q rises, following the spreading effect law.

Why the others are wrong:

• B: ATC typically falls initially but rises after minimum due to increasing AVC from diminishing marginal returns.
• C: AVC falls at first but rises beyond efficient scale due to law of diminishing returns.
• D: TVC increases with output as more variable inputs are needed.

Final answer: A