If the average fixed cost (AFC) of producing 5 bags of rice is $20.00; the average fixed cost of producing 10 bags will be

A. $2.00
B. $4.00
C. $10.00
D. $20.00

Correct Answer:

Option A = $2.00

Explanation

Average fixed cost decreases as the number of output increases. Hence, if a firm spent $20 to produce 5 bags of rice, when it increases the output level to 10 bags of rice the cost will not change because it is a fixed cost, but rather, the same amount of fixed costs will be spread over a larger number of units of output.

Hence, the $20 cost that was used to produce 5 bags of rice, will accommodate the new level of output.

If 5 bags were produced at $20

Then 10 bags will also be produced at $20 cost

Hence we have 20/10 = 2

$2 is the average fixed cost per unit of producing 10 bags