Class 11 Economics Chapter 3 Production & Costs, (Assam Higher Secondary Education Council) AHSEC Class 11 Economics Question Answer in English Medium each chapter is provided in the list of AHSEC so that you can easily browse through different chapters and select needs one. Assam Board Chapter 3 Production & Costs Class 11 Economics Question Answer can be of great value to excel in the examination.
AHSEC Class 11 Economics Chapter 3 Production & Costs
Class 11 Economics Chapter 3 Production & Costs Notes cover all the exercise questions in AHSEC Textbooks. The AHSEC Class 11 Economics Chapter 3 Production & Costs Solutions provided here ensure a smooth and easy understanding of all the concepts. Understand the concepts behind every chapter and score well in the board exams.
Production & Costs
Chapter – 3
PART – A
VERY SHORT ANSWER QUESTIONS
1. What does the production function of a firm refer to ?
Ans: Production function is a functional relationship between physical inputs and physical outputs. For various quantities of inputs used, it gives the maximum quantity of output that can be produced.
2. Suppose there are two factors in a production process, ― factor 1 and factor 2. Write down the production function.
Ans: Q = F (Factor 1, factor 2)
3. Simplify the meaning of the following production function q = f ( x₁.x₂ ).
Ans: With the given amount of input X₁ , and X₂ , the output ‘q’ have been produced.
4. What is an isoquant ?
Ans: An isoquant shows different combinations of factors of production , which when used in the production process , yield equal production or equal amount of output and the producer will be indifferent as regards choice among those factor combinations.
5. Write true or false :
In the long run, there is no fixed input.
Ans: True
6. What us average product ?
Ans: Average product of an input is defined as the output per unit of variable inputs. i.e. Ap=TP/Qx
7. What is marginal product ?
Ans: Marginal product of an input is defined as the change in output per unit of change in the input , when all other inputs are held constant i.e. MP = Change in output/ change in input
8. What does the cost function of a firm reveal ?
Ans: Cost function refers to the mathematical relation between cost of a product and the various determinates of its costs. In the cost function , the dependent variable is unit cost or total cost and the independent variables are variable cost .
9. Fill in the blank :
TC= ____+ TFC .
Ans : TVC
10. How can you define marginal cost at zero level of output ?
Ans: Can’t define.
11. Fill in the blank :
AC = AVC + ___.
Ans : AC = AVC + AFC
12. The total output of a firm is 60 units when it uses 12 units of labor.Calculate average product of labour.
Ans : AP=TP/L=60/12=5 units
13. The total product of a firm is 70 units when it employs 10 units of labour. If the level of output increases to 75 units due to one increase in labour , find out the marginal product of labour.
Ans: Marginal Product of Labour is MPL= 5 units
14. The total cost of a production unit is Rs. 100 and it produces 10 units of output . If the marginal cost of the 11th unit of the product is Rs. 15 , what will be the total cost of the production unit ?
Ans: 115 units.
15. Write true or false :
In the process of production, the consumer combines the inputs and produces output.
Ans: True.
16. Write true or false :
The revenue earned by a firm is called profit.
Ans: False .
17. Write true or false :
The production function of a firm reveals the relationship between inputs used and output produced by it.
Ans: True.
18. Choose the correct portion :
( Marginal product / total product / average product ) – is defined is the change in output per unit of change in the input when all other inputs are held constant .
Ans: Marginal Product.
19. Choose the correct portion :
When a proportional increase in all inputs results in an increase in output but by less than the proportion, it calls ( decreasing returns to scale / increasing returns to scale / constant returns to scale ) .
Ans: Decreasing Returns to Scale.
20. Fill in the blanks :
In order to produce output , the firm needs to employ___.
Ans: Inputs.
21. What does the constant return to scale imply ?
Ans: A proportional increase in all inputs results in an increase in output by the same proportion.
22. What is increasing return to scale ?
Ans: A proportional increase in all inputs results in an increase in output by more than the proportion.
23. What does return to scale refer ?
Ans : It refers to the long run production function.
24. Fill in the blanks :
(i) A.C= Total Cost/?
(ii) T.C= TVC+___
Ans: (i) A.C= Total Cost/quantity
(ii) T.C= TVC+TFC
25. Fill in the blanks :
The relationship between inputs used and output produced by the firm is called___.
Ans : production function.
26. What is factors of production ?
Ans: Whatever is used in the production process is called factors of production.
27.State any two factors affecting the supply of a commodity.
Ans: The two factors affecting the supply of a commodity are –
(a) Price of the commodity : There is a direct relationship between price of a commodity and its quantity supplied Generally higher the price , higher the quantity supplied and vice versa.
(b) Prices of other goods : The supply of a good depends upon the prices of other goods . An increase in the prices of other goods makes them more profitable for the firms. They will increase their supply .
B. SHORT ANSWER QUESTION TYPE- II : ( MARKS : 3 )
1. Distinguish between input and output .
Ans : Inputs are the ways or methods through which production is done and output are its results, that are provided by the services of the inputs.
2. Distinguish between fixed input and variable input.
Ans: Fixed input do not changes with the level of production, but th variable inputs changes with the level of production output.
3. Distinguish between short – run and long – run.
Ans : In the short run , a firm cannot vary all the inputs. One of the factors , factor 1 or factor 2 cannot be varied and therefore, remain fixed in the short run. In order to vary the output level, the firm can vary only the other factor . The factor that remains fixed is called the fixed input , whereas the other factor , which the firm can vary is called the variable input .
In the long run, all factors of production can be varied. A firm in order to produce different level of output in the long run may vary both the inputs simultaneously. So, in the long run , there is no fixed input .
4. State the law of diminishing marginal product.
Ans : The law of diminishing marginal product says that if we keep increasing the employment of an input , with other inputs fixed, eventually lity. a point will be reached after which , the resulting addition to output will re start falling .
5. State the law of variable proportion .
Ans : The law of variable proportion states that as the proportion of factors is changed , the total production at first increases more than proportionately and finally less than proportionately.
6. Define average variable cost.
Ans : Average fixed cost of a firm is equals to total fixed cost divided by output . i.e , AFC = TFC/Q
Average variable cost of a firm is the total variable cost divided by the output , AVC = TVC/Q. Average cost of a firm is the total cost divided by output. Cost per unit of commodity is called average cost .In the words of Dooley. “The average cost of production is the total cost per unit of output.”
Average cost is the sum total of average fixed cost variable and average cost i.e. , AC = AFC + AVC It is shown in the following diagram .
In the diagram, AC is the average cost curve, AVC is the average variable cost curve and AFC is the average fixed cost curve.
When output = OL
AVC = LT
AFC = LK
AC = ( AVC + AFC ) = ( LT + LK ) = LS
LT = SK
Likewise , when output = OL ,
AVC = L₁T₁
AFC = L ₁ T₁
AC = L ₁T ₁ + L ₁ T ₁
= L ₁ S₁
L₁T₁ = T ₁ S ₁
7 . In which situation a production function satisfy increases returns to scale ?
Ans : A production function satisfy increasing returns to scale , when proportional increase in all inputs result in an increase in output by than the proportion .
8. When does a production function hold constant returns to scale ?
Ans: A production function satisfy constant returns to scale , when a proportional increase in all inputs results in an increase in output by the same proportion.
9. State the reason behind the U – shaped short – run marginal cost curve.
Ans : Marginal cost is the additional cost that a firm incurs to produce one extra unit of output. According to the law of variable proportions initially , the marginal product of a factor increases as employment increases , and then after a certain point, it decrease.This means initially to produce every next unit of output , the requirement of the factor becomes less and less and then after a certain point , it becomes greater and greater . As a result , with the factor price given , initially the SMC falls and then after a certain point , it rises . SMC curve is therefore , ‘ U ‘ shaped .
10. What is isoquant ? Explain graphically.
Ans : An isoquant shows different combinations of factors of production , which when used in the production process , yield equal production or equal amount of output and the producer will be indifferent as regards choice among those factor combinations.
11. If the total production with 5 units of a variable factor is 56, calculate the average product. If the variable factor is increased by 1 more unit as a result of which the total factor becomes 57 , what will be the marginal product ?
Ans: Given TP = 56
Q= 5
Again, the variable factor increased by 1 more unit
Q₁ = 6
12. State the reasons behind the working of the law of diminishing marginal product .
Ans: Causes of diminishing returns to a factor are as fallows :
(a) Fixity of the factor : Fixity of the factor is the principal cause that explains the occurrence of the law of diminishing returns . As more and more units of the variable factor recontinue to be combined with the fixed factor, the letter gets overutilized.
(b) Imperfect factor substitutability : Factors of production are imperfect substitutes of each other. More and more of labour for example, cannot be continuously used in place of additional capital. Accordingly, diminishing return to the variable factor become inevitable.
(c) Poor co – ordination between the factor : Continuous increasing application of the variable factor along with fixed factor beyond a point cross the limit of ideal factor ratio. This results in poor co ordination between fixed and variable factors. The law of diminishing returns accordingly sets in.
13. Give the meanings of increasing returns to scale, decreasing returns to scale and constant returns to scale .
Ans: In the long run , all factors of production become variable; no factor remains fixed . In this period, production of a commodity can b increased by increasing all the factors in the same proportions. If all factors are increased in the same proportion, the scale of production increases and the corresponding behaviour of output is studied as return to scale. Thus , returns to scale refers to the behaviour of output as all factor inputs are varied in the same proportion . It is a long run concept. According to Watson , ” Returns to scale relates to the behaviour of total output as all inputs are varied in the same proportion and it is a long run concept . ” There are three types of returns to scale .
They are :
(a) Increasing returns to scale ,
(b) Constant return to scale ,
(c) Diminishing return to scale occur when a given percentage Increasing in all factor inputs causes proportionately greater increase in output . If 10% incomes in all factor input cause , say 15 % increase in output , it is evidently a case of increasing return to scale . This is illustrated in the figure beside The fig.
shows that 10 % increase in all factor inputs causes 15 % crease in output . Likewise, 15% crease in factor inputs causes 25% increase in output. Thus , any percentage increase in inputs is causing a greater percentage increase in output .
Again , constant returns to scale occurs when a given percentage increase in all factor inputs causes equal percentage increase in output , If 10 % increase in all factor inputs causes 10 % increase in output , it is a case of constant returns to scale. The following figure illustrate this situation.
the fig. shows that 10 % increase in all factor inputs causes 10 % increase in output . Likewise, 20 % increase in input causes 20 % increase in output. Thus, any percentage increase in inputs is matched with equal percentage increase in output. OQ line , accordingly forms a 45 ° angle from the origin .
On the other hand , diminishing returns to scale occur when a given percentage increase in all factor inputs causes proportionately lesser increase in output . If 15 % increase in all factor inputs causes , say , only 10 % increase in , output it is a case of diminishing returns to scale. The fig shows that 15% increase in altr. inputs causes only 10% increase in output. Likewise, 25% increase factor inputs causes only 15% increase in output. Returns to scale thus diminishing.
14. The total production schedule (TPL) of labour (L) is give Find out the average product schedule (APL) and marginal proda schedule (MPL) of labour.
Ans:
15. The average product schedule (APL) of labour (L) is given below. Find out the total product schedule (TPL) and marg product schedule (MPL)
Ans:
16. The marginal product schedule of labour (L) is given below. Find out the total product schedule (TPL) and average product schedule (APL) of labour.
Ans:
17. The total cost (TC) of a production unit is Rs. 70 and the level of output (Q) is 5. Find out the average cost (AC) and variable cost (AVC) if the average fixed cost (AFC) is Rs. 4.
Ans: Given, T Rs. = 70
Q = 5
∴ AC= TC/Q =70/5 =14
Niw, we know that,
AC=AVC + AFC
⇒14=AVC +4
∴ AVC=14-4=10
18. The total fixed cost of a firm is Rs. 100, when it produces 15 units of output. If the level of output increases to 30 units, will be the fixed cost in the short-run ? Explain.
Ans : Total fixed cost (TFC) = Rs. 100
Level of output, Q=15 units
increase in output = 30 units
We know that fixed costs of a firm do not vary with the level of output. They remain fixed even if the production process is temporarily shut down. So although the level of output increases from 15 units to 30 units. The fixed cost in the short run will be same as before i.e. Rs. 100. Thus the fixed costs in the short run is Rs. 100.
19. What is Cobb-Douglas Production function.
Ans: Cobb-Douglas Production function is
Q-AKᵃLᴮ
Where Q= quantity
A=constant
K=Capital
L= labour
20. Match the following:
(a) Law of variable proportion
(b) Returns to scale
(c) Long run average cost curve
(i) U shoe
(ii) Short run
(iii) Long run
Ans: (a) Law of variable proportion
(b) Returns to scale
(c) Long run average cost curve
(ii) Short run
(iii) Long run
(i) U shoe
21. State the reasons behind the U-shaped long-run average cost curve.
Ans:
Long run average cost curve is U shaped due to operation of law of variable proportions increasing returns imply diminishing costs, constant returns mean constant costs and diminishing returns imply increasing costs. An output is increased, AC first falls, reaches its minimum and then rises. Hence AC curve became U- shaped. Minimum point of AC curve indicates lowest per unit cost of production.
22. State the relationship between TC, AC and MC in a process of production.
Ans : (i) AC and MC are derived from TC.
(ii) AC and MC curve are U shaped due to the law of variable proportions.
(iii) When TC rises at a diminishing rate, MC declines.
(iv) When the rate of increase is total cost start rising the MC is increasing.
23. Explain the concept of short-run and long-run in the of production.
Ans: A period is defined as short run or long run simply by looking at weather all the inputs can be varied or not. In the short run, a firm cannot alter all the inputs. Only one factor can be varied other factors remain fixed in the short run. The firm does not have sufficient time to very factors like machine, building etc.
In the long run a firm can change all factors of production. To produce different levels of output, it may vary both the inputs simultaneously. Hence there is nothing like fixed input in the long run. Long run, thus refers to longer time period than the short run.
24. Explain the meaning of returns to scale with the help of a production function.
Ans: Return to scale studies the behaviour of output, when all the factor inputs are changed, simultaneously, in the same proportion, in the lo run. When we change all the inputs, that too in the same ratio, it leads a change in scale of production. For example one unit of capital (k) a one unit of labour (L) i.e. Ik+1L produce 100 units of output. If inputs are doubled i.e. 2k+2L then output may increase by more then 100%, equal to 100% or by less then 100% All these possibilities are returns to scale which called used. Increasing returns to scale, constant returns to sc and diminishing returns to scale.
25. Explain the reasons behind the working of the law of variable proportion.
Ans: The reason behind the working of the law of variable proportion are as follows :
(i) Better utilisation of the fixed factors
(ii) Increase efficiency of variable factors (iii) Indivisibility of fixed factor.
(iv) Optimum combination of factors
(v) Imperfect substitutes.
(vi) Limitation of fixed factor
(vii) Poor coordination between variable and fixed factor
(viii) Decrease in efficiency of variable factor.
26. Explain the relation between market price and marginal revenue of a price taking firm.
Ans: Marginal revenue refers to the increase that a company received when it sells one additional unit of a product. At first glance, you might assume that marginal revenue is simply the price of the product: If your product selles for $5, for example , it would appear you’d get $5, in revenue if you sold one unit. But it’s more complicated than that.
27. State any two assumptions of the law of variable proportions.
Ars : The assumptions of the law of variable proportion are given as below:
(a) It is assumed that the technique of production should remain constant during production.
(b) It operates in the short-run because in the long run, fixed inputs become variable. facto There’s really nothing tricky about price. The basic definition of price the amount of money a customer pays for something is absolutely correct.But to understand the difference between price and marginal revenue, it’s critical to recognize where prices come from.
SHORT ANSWER QUESTIONS TYPE-I: (MARKS : 4)
1. Draw the total product curve typical firm and explain it.
Ans:
In figure above, TP is the typical total product curve of a firm which changes as the amount of factors increase/decrease.
2. Define long-run average cost and long-run marginal cost and explain their nature wit the help of corresponding curves.
Ans : For the first unit of output, both long run marginal cost and the average cost are the same. Then as output increases, long run average cost (LRAC) initially falls, and than after a certain point, it rises. As long.
as average cost is falling, marginal cost is rising, marginal cost must be less than the average cost. When average cost is rising, marginal cost must be greater than the average cost. LRMC curve is therefore a ‘U’ shaped curve. It cuts the LRAC curve from below at the minimum point of the LRAC. In the diagram, long run marginal cost and the average cost curves drawn.
3. Explain the relationship between average product and marginal product with the help of diagram.
Ans: The diagram follows
The relationships are :
(i) When MP> AP, AP rises, part P in the diagram.
(ii) When MP= AP, AP is maximum, point Q in the diagram.
(iii) When MP<Ap, AP falls, part R in the diagram.
4. Show that the average fixed cost curve is a rectangular hyperbola.
Ans: Average fixed cost equals to total fixed cost divided by output.The average fixed cost curve is downward sloping from left to right. It is shown in the diagram beside.
AFC is the average fixed cost curve, which is sloping downward to right. It look so due to its very nature, as the production goes on increasing. average fixed cost goes on diminishing.
5. Draw and explain the shape of the average variable cost curve.
Ans: The shapes of short run marginal cost (SMC), average variable cost (AVC) and short run average cost (SAC) curves are shown in the diagram beside-
AVC reaches its minimum at q₁ units of output. To the left of q₁, AVC is falling and SMC is less than AVC. To the sight of q₁, AVC is rising and SMC is greater than AVC. SMC curve cuts the AVC curve at ‘P’, SAC which is the minimum point of AVC curve. The minimum point of SAC 8 is ‘S’, which corresponds to the output q, It is the intersection point between SMC and SAC curve. To S. AVC the left of q₂, SAC IS fall and SMC ndino greater is less than SAC, To the right of q₂, SAC is rising and SMC is SI 9 than SAC.
6. The total cost (TC) schedule of a production unit is give below. Find out the average cost (AC) schedule for the production unit.
Ans:
7. The production function of a firm is given as :
Q=5L¹/₂ K¹/₂ Calculate the level of output when it employs 25 units of labour (L) and 9 units of capital (K).
Solution: Given Q=5L¹/₂K₁/₂
When L=25 units and K = 9 Units
∴ Q = 5(25)¹/₂(9)¹/₂ = 5×5×3
∴ Q=75 units
8. The total product schedule of a firm is given below:
Calculate the marginal product and average product of the firm.
Ans:
9. Show the relationship between Average cost and marginal cost with a diagram.
Ans:
The relationship is:
(i) when average costs (AC) falls with an increase in output, MC always remains lower than AC.
(ii) when AC is rising, marginal cost (MC) remains above AC.
(iii) MC and AC are equal when AC is minimum. In other words, MC curve cuts AC curve at its minimum point.
10. The production function of a firm is given as Q=5L¹/₂ K¹/₂ Calculate the level of output when it employs 16 units of labour (L) and 36 units of Capital (K).
Ans: Given Q = 5L¹/²K¹/²
L-16 unit K= 36 unit
∴ Q = 5(16)² (36) =5×4×6 =120 unit.
11. Explain the conditions for equilibrium of a firm.
Ans: A firm is in equilibrium when it has no propensity to modify its level of productivity. It requires neither extension nor retrenchment. It wants to eam maximum profits in by equating its marginal cost with its marginal revenue, i.e. MC = MR. Diagrammatically, the conditions of equilibrium of the firm are (1) the MC curve must equal the MR curve. This is the first order and essential condition. But this is not a sufficient condition which may be fulfilled yet the firm may not be in equilibrium. (2) The MC curve must cut the MR curve from below and after the point of equilibrium it must be above the MR.This is the second order condition. Under conditions of perfect competition, the MR curve of a firm overlaps wit the AR curve. The MR curve is parallel to the X axis. Hence the firm is in equilibrium when MC = MR = AR.
12. Can there be some fixed cost in the long run ? Justify your answer.
Ans : No, there can’t be any fixed cost in the long run.
In the long run, all factors of production can be varied. So in the long run, there is no fixed input.
13. The production function of a firm is given as Q=5L¹/₂ K¹/₂. Calculate the level of output (Q) when it employs 25 units of labour (L) and 9 units of capital (K).
Ans : Given, L=25, K = 9
∴ Output (Q) = 5L¹/₂K¹/₂ = 5.(25)¹/₂ .
(9)¹/₂ = 5. (5²)¹/₂ . (3²)¹/₂ = 5.5.3=75
LONG ANSWER QUESTIONS TYPE : (MARKS : 6)
1. Explain the concepts of total product, average product and marginal product and rep resent them with the help of an imaginary table.
Ans : Total production is the total amount of goods and services produced in a given period.
Average product of an input is defined as the output per unit of variable
Inputs. i.e. AP Qx/TP
Marginal product of an input is defined as the change in output per unit of change in the input, when all other inputs are held constant i.e.
MP=Change in output /Change in input
2. Show with the help of diagram that the total cost is the vertical sum of total fixed cost and total variable cost.
Ans : The total money cost incurred in producing a given quantity of production is called total cost of a firm. Total cost (TC)=Total fixed cost (TFC) + Total Variable cost (TVC)
According to Dooley, “Total cost of production is the sum of all expenditure incurred in producing a given volume of output” Total fixed costs do not change with the change in volume of output, whether the output is zero or maximum, fixed cost remain the same. In the words of Anatal Murad.
“Fixed costs are costs which do not change with change in the quantity of output.”
Total variable costs are those, which are incurred on the use of variable factors. Variable cost is one, which varies as the level of output varies.The relation between total fixed cost, total variable cost and total costs explained with the help of table and figure below―
In the above table, total costs can be uneven by aggregating fixed costs and variable costs, with increase in output, total costs are also increasing. When output is zero, total costs are Rs. 10, because fixed costs are Rs. 10 although variable costs are zero, when output increase to 6 units total costs go up to Rs. 48 (38+10)
In the figure, units of output are shown on ox axis and costs on oy axis. FC line represents fixed costs, VC is variable costs curve and TC is total cost curve. TC curve begins from the starting point of curve. At point ‘O’, output is zero, but fixed cost is Rs.10, so total cost Rs. 10. Difference between total cost and variable cost is uniform and it is equivalent to fixed cost. That is why the distance between total cost curve and total variable cost curve is uniform throughout their length.
3. Show the relationship of short-run marginal cost, average variable cost and average cost with the help of curve and explain.
Ans : All aspects of short period costs like fixed cost (FC), variable cost (VC), average fixed cost (AFC), average variable cost (AVC), average cost (AC) and marginal cost (MC) are shown together in the diagram.
In the diagram, average fixed fixed cost (AFC), average variable cost (AVC) curve is continuously falling downwards, because as production increases, AFC falls. Initially, it falls sharply, later the rate of fall slows down. AVC is average variable cost. Point ‘A’ is its lowest point. After point ‘A’, this curve rises upward. AC is short period average cost (AC). As it is clear from the above diagram, the gap between average cost and average variable cost becomes narrower as the production goes on increasing. The gap is due to average fixed cost. As the average fixed cost goes on falling, the difference between average cost and average variable cost becomes narrower and narrower. Marginal cost curve is also ‘U’ shaped. This curve cuts average cost (AC) curve and average variable cost curve at their lowest points. But the reason different. It is not the law of variable proportions, but he behaviour of returns to scale.
4. The short-run total cost (TC) function of a production unit is given below. Find out the total variable cost (TVC) average fixed cost (AFC), average variable cost (AVC) and average cost (AC) schedule.
Ans:
5. The production function of a production units is given as:
Q = 2L + 3K, Where K = capital and L= Labour
(i) Find out the maximum level of output, m when L=5 and K=l0.
(ii) Find out the maximum level of output, when L=6 and K=0.
Ans : Q = 5L+ 2K = 5.0+2.10 = 20 (L=0, K= 10 given)
Maximum possible output is 20 units.
6. Let the production function of a firm be given as :
Q = 5K²L², where K = capital and L=Labour.
(i) Find out the level of output when
K = 0 and L=6
(ii) Find out the level of output when
K=2 and L=3.
Solution : Q=5.(6)¹/₂0¹/₂ = 0
Q=5. (3)¹/₂. (2)¹/₂ = 5.3¹/₂. 2¹/₂=5.3¹/₂.
2¹/₂ = 5.(3.2)¹/₂+¹/₂= 5.6=30
7. The short-run average cost (AC) schedule of a firm is given as below:
(i) Find out total cost (TC) schedule and marginal cost (MC)schedule.
(ii) It the total fixed cost (TFC) is Rs. 10, find out total variable cost (TVC) and average variable cost (AVC).
Ans:
8. The short-run total cost (TC) schedule of a firm is give below. Find out the total variable cost, total fixed cost, average cost, average variable cost and marginal cost:
Ans:
(Note: At 1st unit of output, MC= TVC=ACC, ∴ TFC=0)
9. Show different short-run cost curves and explain their natures :
Ans: Since total fixed cost remains constant at all levels of output, total fixed cost curve becomes a straight line parallel to horizontal axis.
Total variable cost curve changes with change in output. It initially increase at a decreasing rate as output increases and then it increases at increasing rate with increase in output. This is directly due to the operation of the law of variable factor. Then after a point, total variable cost starts increasing at an increasing rate. This happens because of diminishing returns to the variable factor. Three things are important regarding the behaviour of total variable cost curve. 1st, TVC is a positively sloping curve showing that as output increases. TVC also increases, second TVC curve is concave de nward in the beginning indicating that TVC increases at a decreasing rate and then beyond a output level. It is concave upward indicating that TVC increases at an increasing rate.
Third, TVC curve starts from the origin point which indicating that when output is zero. TVC is also zero. Total cost is total fixed cost plus total variable costs. Since a constant fixed cost is added to total variable cost at different levels of output the shape of TC curve is the same as that of the total variable cost curve. But total cost curve does not originate from the point of origin but from the starting point of total fixed cost. This is because total fixed cost= total cost at zero level of output. The vertical distance between the total variable cost curve and total cost curve is same at all levels of output. Therefore, like the total variable cost curve, total cost curve first increases at a decreasing rate and then at an increasing rate. This behaviour of the total cost curve directly follows from the law of Variable proportion. Three short run curve are shown in the figure below:
In the table first column shows different levels of output. In the second and third columns the values of total fixed cost and total variable cost are shown. In the fourth column total cost is shown by adding the total fixed cost and total variable cost.
Short run Average cost curve is ‘U’ shaped due to the operation of law of variable proportions dividing total cost by output we obtain the average cost. In the initial stage of production average productivity increases and therefore SAC falls. Then after a point average productivity beings to fall to causes SAC to increase.
Hence, AC curve becomes ‘U’ shaped. Minium point of AC curve indicates lowest per unit cost of production.
Short run marginal cost curve is also ‘U’ shaped which indicates that marginal cost falls in the beginning, then remains constant and ultimately it rises. The reason behind ‘U’ shaped of marginal cost curve is operation of law of variable proportion.
10. “Long-run marginal cost (LRMC) curve cuts the long-run average cost (LRAC)” Explain
Ans:
In the long run, all inputs are variable. There is no costs like fixed costs. Long run average cost curve and long run marginal cost curve are U shaped. Long run marginal cost curve cuts long run average cost curve from below at the minimum point of long run average cost curve,. It is shown in the figure below as mentioned above LAC and LMC curves are U shaped. It is because that increasing returns to scale are observed at the initial.level of production. This is then followed by the constant returns to scale and then by the diminishing returns to scale. These the ‘U’ shaped of LAC is determined by returns to scale. Its downward sloping portion corresponds to increasing returns to scale and upward portion corresponds to decreasing returns to scale. At the minimum point of LAC constant returns to scale is observed constant returns to scale may prevail over a range of output rather than at a single level of output. Hence, long run average cost will have a flat portion in the middle the figure it shows that do long as long. In run average cost is falling, LMC remains below. therefore LMC curve cuts the LAC curve at its minimum point. .
11. Explain the concept of the cost function of a typical firm with the help of an imaginary table.
Ans: Cost function means the functional relationship between cost and output. It shows total costs at each level of output. Average and marginal short run in which few inputs can be varied or for the long run in which all inputs can be varied cost function can expressed in this way C= f (Q) where C= total cost, Q= output.
A firm would always look the least cost combination of inputs for a given level of output. Therefore for a firm cost function gives the least cost combination of inputs at different level of output.
12. Distinguish between explicit cost and implicit cost. Give one example of each of them.
Ans : An implicit cost is a cost that has occurred but it is not initially shown or reported as a separate cost. On the other hand, an explicit cost is one that has occurred and is clearly reported as a separate cost. Below are some examples to illustrate the difference between an implicit cost and an explicit cost. The explicit cost of something is an actual expense that is incurred. For example, you buy a new SUV for $30,000. That’s $30,000 that you legitimately have to pay (or pay back in loans) out of pocket. Most companies and individuals think that explicit costs are the only type of costs that they incur. After all, it doesn’t cost you anything if you don’t actually see the money leaving your wallet (or bank account), right? Wrong.Implicit costs are exactly what they seem to be, implied. Think of this as an opportunity cost, or what you give up in order to do something else The general explanation is the following: your first choice for lunch isa hamburger and your second choice is pizza. What is the opportunity cos of eating a hamburger? The answer is the pizza. It’s what you have because you choose something else.
13. Find out the equilibrium quantity of output (Q).
Ans: Equilibrium quantity of output (Q) is 5 units because at this level of output MC=MR and after this output level is MC―MR.
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