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Which of the following correctly states the relationship among the average cost functions?
AAFC = ATC − AVC
BAVC = AFC + ATC
CAFC = ATC + AVC
DATC = AFC − AVC
Answer & Solution
Correct answer: A. AFC = ATC − AVC
1. The basic identity is ATC = AFC + AVC.
2. Rearranging for AFC gives AFC = ATC − AVC.
3. This matches option A exactly.
4. (B), (C) and (D) all violate the identity, since AVC and AFC are the two parts that sum to ATC, not differences in those orders. Hence AFC = ATC − AVC.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.6_
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