Suppose that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. Refer to Scenario 13-17. Average fixed cost will be rising at all points. falling at all points. constant. U-shaped.
The correct answer and explanation is :
Correct Answer: Falling at all points.
Explanation (Approx. 300 words):
In the context of microeconomics and production theory, average fixed cost (AFC) is calculated as:
[
AFC = \frac{\text{Total Fixed Cost (TFC)}}{\text{Quantity of Output (Q)}}
]
Total Fixed Cost is constant—it does not change with the level of output. Examples include rent, salaries of permanent staff, or machinery costs. As more units of output are produced, the fixed cost is spread over a larger number of units, which causes average fixed cost to fall continuously.
Now, consider the scenario provided: the firm experiences decreasing marginal product of labor with each additional worker. This means that each new worker contributes less additional output than the one before. This principle is known as the law of diminishing marginal returns, and it typically occurs because of the fixed inputs (like a limited number of machines or space) becoming increasingly crowded as more labor is added.
However, it’s crucial to note that decreasing marginal product affects marginal cost, not fixed cost. The falling productivity of labor leads to rising marginal cost and possibly rising average variable cost, but it does not impact fixed cost, which remains constant regardless of output.
Since AFC depends only on total fixed cost and the quantity of output, and total fixed cost remains the same, the only variable in the formula is output. As long as output increases, AFC will fall. This happens regardless of how marginal product or marginal cost behave.
Thus, in this scenario, even though the firm faces diminishing marginal product, average fixed cost will be falling at all output levels as fixed costs are spread over more and more units of output.
Conclusion: The correct answer is “falling at all points.”