Define fixed cost. Give an example. Explain with the reason the behaviour of Average Fixed Cost as output is increased.

OR

Define marginal product. State the behaviour of the marginal product when only one input is increased and other inputs are held constant.

● Fixed cost is the cost that does not change with the change in the level of output.

● It remains constant.

● For example, the rent paid for the building.

● If the output is increased, the average fixed cost decreases.

● This is because the average fixed cost is the total fixed cost by output or AFC = TFC/ Output.

● The total fixed cost is constant, so the average fixed cost falls.

OR

● Marginal product is the increase in the total product as one more unit of the variable unit is added.

The behaviour of the marginal product when only one input is increased and other inputs are held constant is mentioned below:

● Initially, marginal product increases.

● After reaching a point, the marginal product begins to falls but remains positive.

● After some time, the marginal product becomes negative.