Explain one reason why average fixed costs change as excess capacity increases.

Average fixed costs change as excess capacity increases due to the following reason:

1. Understanding Fixed Costs: Fixed costs are those costs that do not change with the level of output. These include costs such as rent, salaries, and equipment costs. These costs are incurred regardless of whether the business is producing anything or not.

2. Defining Excess Capacity: Excess capacity refers to the situation where a firm is not producing at its maximum output level. In other words, the firm has resources that are not being fully utilized.

3. Impact on Average Fixed Costs: When there is excess capacity, it means that the firm is not producing as much as it could. As a result, the fixed costs are spread over fewer units of output. This leads to an increase in the average fixed cost per unit.

4. Example: For instance, if a company has a fixed cost of $1000 and it produces 10 units, the average fixed cost per unit is$100 (1000/10). However, if the company has excess capacity and only produces 5 units, the average fixed cost per unit increases to $200 (1000/5).

So, the reason why average fixed costs change as excess capacity increases is because the fixed costs are spread over fewer units of output, leading to a higher average fixed cost per unit.