Final answer:
The average fixed cost curve resembles a hyperbolic shape, decreasing as output increases. It illustrates the concept of 'spreading the overhead', where fixed costs per unit decrease with higher production. Understanding the behavior of fixed and variable costs is crucial for maintaining profitability.
Step-by-step explanation:
A common name for fixed cost is 'overhead'. Dividing fixed cost by the quantity of output produced yields the average fixed cost. Suppose the fixed cost is $1,000. The average fixed cost curve is a hyperbola that decreases as the quantity of output increases. This demonstrates the concept of 'spreading the overhead', which means that as you produce more, the fixed cost is distributed over more units, decreasing the cost per unit.
'Spreading the overhead' is particularly important in understanding how businesses cover their costs. Despite fixed costs being often sunk costs, they still need to be spread across units produced to minimize average costs and ensure prices cover the costs to maintain profitability. It's crucial for a firm's total revenue to exceed total costs to earn a profit. Unlike fixed costs, variable costs can change with production levels and provide insights into cost-cutting capabilities and how costs escalate with increased production.