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Question

# a) Why is Total Variable Cost curve inverse S- shaped? b) What is Average Fixed Cost of a firm? Why is an Average Fixed Cost Curve a rectangular Hyperbola? Explain with help of a diagram.

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Solution

## a) Total Variable Cost is zero at zero level of output. It initially increases at decreasing rate and later it increases at increasing rate. TVC is an inversely S-shaped curve due to the Law of Variable Proportion. b) Per unit fixed cost is known as Average Fixed Cost. As the value of Total Fixed Cost doesn’t vary at any level of output in short run and if it is divided by an incremental number the result would be diminishing with the same proportion as that of the proportion of increase of the number of units and the product will be same. Since TFC remains same at different levels of output, AFC falls as the level of output is increased. The AFC keeps on falling as the level of output increases. AFC can never become zero.

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