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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A small Pune firm making auto components pays monthly factory rent of Rs 80,000 regardless of output. In economic analysis, how does this rent behave as monthly output rises from 1,000 to 2,000 units?

Total fixed cost stays at Rs 80,000 whatever the output, so average fixed cost falls as output rises, from Rs 80 to Rs 40 per unit here. Fixed cost is spread over more units, which is why average fixed cost declines continuously.

  1. ATotal fixed cost stays at Rs 80,000 while average fixed cost fallsCorrect
  2. BTotal fixed cost doubles while average fixed cost stays constant
  3. CTotal fixed cost stays at Rs 80,000 and average fixed cost rises
  4. DTotal fixed cost falls while marginal cost rises
  5. Total fixed cost rises in proportion to output and average fixed cost is unchanged

Explanation

Fixed cost does not vary with output, so total fixed cost remains Rs 80,000. Average fixed cost equals 80,000 divided by output, so it falls from Rs 80 to Rs 40 per unit as output doubles. Options claiming it rises or is proportional confuse fixed with variable cost.

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