As output increases, average cost decreases continually because
A) average variable cost per unit is increasing.
B) average fixed cost per unit is decreasing.
C) total variable cost is increasing.
D) total variable cost is decreasing.
E) total fixed cost is reducing.

Question

Quizplus · Accepted Answer

As output increases, fixed costs are spread across a larger number of units, leading to a decrease in average fixed cost. This means that the average cost (which is the sum of average fixed cost and average variable cost) will also decrease. Option A is incorrect because an increase in output would likely lead to a decrease in average variable cost due to economies of scale. Option C and D are also incorrect because they suggest an increase in cost, whereas the question prompt specifically asks about a decrease in cost. Option E is incorrect because total fixed cost remains constant regardless of output level.

As Output Increases, Average Cost Decreases Continually Because