Question

A common name for fixed cost is “overhead.” If you divide fixed cost by the quantity of output produced, you get average fixed cost. Supposed fixed cost is $\$1,000$. What does the average fixed cost curve look like? Use your response to explain what “spreading the overhead” means.

Short answer

The average fixed cost curve is sloping downward. It asymptotically reaches the axes.

Step-by-step solution

Step 1. Introduction

Fixed cost - A cost of production that does not fluctuate as the amount of output increases.

Step 2. Explanation

We know that fixed costs do not vary while the production level changes. It is the expense that has no relationship with the firm's output level. As a result, as the level of output increases, the average fixed cost, which is the fixed cost divided by the level of output, decreases. This is explained by the fact that if the numerator of a ratio remains constant while the denominator increases, the ratio will continue to decrease. When the average fixed cost is used, this is what happens. That is, the fixed cost is distributed over the output level.