As the level of output increases, what happens to the difference between the val

Question

As the level of output increases, what happens to the difference between the value of average total cost and average variable cost?

As the level of output increases, the difference between the value of average total cost and average variable cost...

1. decreases because average fixed cost decreases as output increases.
2. decreases because average total cost and average variable cost decrease with output.
3. remains constant because average total cost and average variable cost both increase with output.
4. remains constant because average fixed cost remains the same as output increases.
5. increases because average total cost increases with output but average fixed cost decreases with output.

Explanation / Answer

Average total cost (ATC) = Average fixed cost (AFC) + Average variable cost (AVC)

So, ATC - AVC = AFC ( = TFC / Q)

So, as Q increases, AFC decreases.

Option (1) is correct.

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