Economics Cost Of Production Questions
Average fixed cost refers to the fixed cost per unit of output produced by a firm. It is calculated by dividing the total fixed cost by the quantity of output produced. The formula for average fixed cost is:
Average Fixed Cost = Total Fixed Cost / Quantity of Output
Fixed costs are expenses that do not vary with the level of production, such as rent, insurance, and salaries. These costs remain constant regardless of the quantity of output produced. By dividing the total fixed cost by the quantity of output, we can determine the average fixed cost per unit.
For example, if a firm has a total fixed cost of $10,000 and produces 1,000 units of output, the average fixed cost would be $10,000 / 1,000 = $10 per unit.
Average fixed cost is important for firms to understand as it helps in determining the minimum price at which a product should be sold to cover all fixed costs and avoid losses. It also provides insights into the cost structure of a firm and helps in making decisions regarding production levels and pricing strategies.