Correct me if I’m wrong but as far as my understanding goes is that the AFC is always below the AVC…right?
Which of the following most accurately describes the shape of the average fixed cost (AFC) curve? The AFC curve:
A) is always below the average variable cost curve. B) becomes flatter as output increases. C) intersects the marginal cost curve at the marginal cost curve’s minimum.
correct answer is B
Hi Gekko,
AFC is not always below AVC. It is possible for the AFC to be greater than AVC. At very low levels of production it may be possible for AFC to be greater than AVC. At zero output, total fixed costs equal total costs. If you observe the table (Exhibit 13) on page 115 of the Economics volume of the CFA curriculum and notice that it is possible for AFC to be greater than AVC.
Graphically, AFC is generally depicted below the AVC curve. I am not sure why this is the case, but I think it primarily for the ease of analysis - as at zero output, FC = TC, and VC = 0. The average costs with zero output as the denominator make all three curves undefined.
However, for very low levels of output is quite possible for AFC to be greater than AVC.
I hope this helps.
Good luck.
Think of it this way:
AFC will decrease more and more as the output/quantity increases. Fixed costs, by definition, are static and are not variable. Hence, as output/quantity increases, AFC (AVERAGE fixed costs) will decrease and eventually flatten out as the costs are spread over more and more units.
Very Clear guys!
Thanks!!!
You may have been confused in that AFC is always below ATC, but ATC is a sum of AFC and AVC.