Question 1

Q1: Explain the concept of a production function.

Accepted Answer

A production function describes the relationship between the physical inputs used in a production process and the maximum physical output that can be produced. It is a technological relationship that specifies the maximum quantity of output that can be produced with any given combination of inputs....

Question 2

Q10: When does a production function satisfy increasing returns to scale?

Accepted Answer

A production function satisfies Increasing Returns to Scale (IRS) when a proportional increase in all inputs results in an increase in output by a larger proportion. For example, if a firm doubles all its inputs, its output will more than double. This can happen due to factors like greater specializ...

Question 3

Q11: When does a production function satisfy decreasing returns to scale?

Accepted Answer

A production function satisfies Decreasing Returns to Scale (DRS) when a proportional increase in all inputs results in an increase in output by a smaller proportion. For example, if a firm doubles all its inputs, its output will increase, but by less than double. This often occurs in very large fir...

Question 4

Q12: Briefly explain the concept of the cost function.

Accepted Answer

The cost function of a firm describes the minimum cost of producing a certain level of output, given the prices of the factors of production and the available technology. For any desired level of output, a firm can typically use various combinations of inputs. The firm will choose the combination th...

Question 5

Q13: What are the total fixed cost, total variable cost and total cost of a firm? How are they related?

Accepted Answer

Total Fixed Cost (TFC): This is the cost that a firm incurs on its fixed factors of production. These costs do not change with the level of output. Even if the firm produces zero output, it must still pay its fixed costs (e.g., rent for the factory, salaries of permanent staff). The TFC curve is a h...

Question 6

Q14: What are the average fixed cost, average variable cost and average cost of a firm? How are they related?

Accepted Answer

Average Fixed Cost (AFC): This is the total fixed cost per unit of output. It is calculated by dividing TFC by the quantity of output (q).  AFC = TFC / q Since TFC is constant, AFC continuously declines as output increases. Average Variable Cost (AVC): This is the total variable cost per unit of out...

Question 7

Q15: Can there be some fixed cost in the long run? If not, why?

Accepted Answer

No, there cannot be any fixed cost in the long run.  The reason is based on the very definition of the long run. The long run is defined as a period of time sufficient for a firm to vary all its inputs. In the long run, there are no fixed factors of production; all factors, including machinery, buil...

Question 8

Q16: What does the average fixed cost curve look like? Why does it look so?

Accepted Answer

The Average Fixed Cost (AFC) curve is a downward-sloping curve that gets progressively closer to the horizontal axis but never touches it. This shape is known as a rectangular hyperbola. It looks this way because AFC is calculated as Total Fixed Cost (TFC) divided by output (q): AFC = TFC / q. 1.  T...

Question 9

Q17: What do the short run marginal cost, average variable cost and short run average cost curves look like?

Accepted Answer

In the short run, the marginal cost (SMC), average variable cost (AVC), and short run average cost (SAC) curves are all typically 'U'-shaped.    Short Run Marginal Cost (SMC): The SMC curve first slopes downwards, reaches a minimum, and then slopes upwards. This 'U' shape is a direct result of the l...

Question 10

Q18: Why does the SMC curve cut the AVC curve at the minimum point of the AVC curve?

Accepted Answer

The Short Run Marginal Cost (SMC) curve cuts the Average Variable Cost (AVC) curve from below at the AVC curve's minimum point. This relationship is mathematical.    When SMC  AVC: If the cost of producing an additional unit is greater than the current average variable cost, this new, higher cost wi...

Question 11

Q19: At which point does the SMC curve cut the SAC curve? Give reason in support of your answer.

Accepted Answer

The Short Run Marginal Cost (SMC) curve cuts the Short Run Average Cost (SAC) curve from below at the minimum point of the SAC curve. Reason: The reasoning is identical to the relationship between SMC and AVC. The SAC is the average of all costs, and the SMC is the cost of the next unit.    When SMC...

Question 12

Q2: What is the total product of an input?

Accepted Answer

The Total Product (TP) of an input is the total quantity of output produced by a firm with a given quantity of that input, while keeping all other inputs constant. It describes the relationship between a variable input and the resulting output. For instance, if we consider labour as the variable inp...

Question 13

Q20: Why is the short run marginal cost curve 'U'-shaped?

Accepted Answer

The short run marginal cost (SMC) curve is 'U'-shaped due to the Law of Variable Proportions (or the Law of Diminishing Marginal Product). Marginal cost is the additional cost of producing one more unit of output. In the short run, this additional cost is mainly the cost of the additional variable i...

Question 14

Q21: What do the long run marginal cost and the average cost curves look like?

Accepted Answer

Both the Long Run Average Cost (LRAC) and Long Run Marginal Cost (LRMC) curves are typically 'U'-shaped.    Long Run Average Cost (LRAC) Curve: The 'U' shape of the LRAC curve reflects the returns to scale.        Downward-sloping part: Corresponds to Increasing Returns to Scale (IRS). As the firm e...

Question 15

Q22: The following table gives the total product schedule of labour. Find the corresponding average product and marginal product schedules of labour. | L |...

Accepted Answer

To find the Average Product (AP_L) and Marginal Product (MP_L), we use the following formulas:    AP_L = TP_L / L    MP_L = ΔTP_L / ΔL (Change in Total Product / Change in Labour) The calculated schedules are as follows: | L (Labour) | TP_L (Total Product) | AP_L (Average Product) | MP_L (Marginal P...

Question 16

Q23: The following table gives the average product schedule of labour. Find the total product and marginal product schedules. It is given that the total pr...

Accepted Answer

To find the Total Product (TP_L) and Marginal Product (MP_L), we use the following formulas:    TP_L = AP_L  L    MP_L = ΔTP_L / ΔL (Change in Total Product / Change in Labour) The calculated schedules are as follows: | L (Labour) | AP_L (Average Product) | TP_L (Total Product) | MP_L (Marginal Prod...

Question 17

Q24: The following table gives the marginal product schedule of labour. It is also given that total product of labour is zero at zero level of employment....

Accepted Answer

To find the Total Product (TP_L) and Average Product (AP_L), we use the following logic and formulas:    Total Product is the cumulative sum of Marginal Products: TP_L(n) = TP_L(n-1) + MP_L(n)    AP_L = TP_L / L The calculated schedules are as follows: | L (Labour) | MP_L (Marginal Product) | TP_L (...

Question 18

Q25: The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm? Calculate the TVC, AFC, AVC, SAC and...

Accepted Answer

First, we determine the Total Fixed Cost (TFC). TFC is the cost at zero output. From the table, TC at Q=0 is 10. Therefore, TFC = Rs 10. We can now calculate the other cost schedules using the following formulas:    TVC = TC - TFC    AFC = TFC / Q    AVC = TVC / Q    SAC = TC / Q (or SAC = AFC + AVC...

Question 19

Q26: The following table gives the total cost schedule of a firm. It is also given that the average fixed cost at 4 units of output is Rs 5. Find the TVC,...

Accepted Answer

First, we find the Total Fixed Cost (TFC). We are given that AFC at 4 units is Rs 5.    AFC = TFC / Q    5 = TFC / 4    TFC = 5  4 = 20 So, the Total Fixed Cost is Rs 20. Now we can calculate the other cost schedules:    TVC = TC - TFC    AFC = TFC / Q    AVC = TVC / Q    SAC = TC / Q *   SMC = ΔTC...

Question 20

Q27: A firm's SMC schedule is shown in the following table. The total fixed cost of the firm is Rs 100. Find the TVC, TC, AVC and SAC schedules of the firm...

Accepted Answer

There appears to be a typo in the question; the second column is labelled 'TC' but the values represent Short-run Marginal Cost (SMC). Assuming the values are for SMC and TFC = Rs 100. We can find the schedules using these relations:    Total Variable Cost (TVC) is the cumulative sum of SMC: TVC(n)...

L	TP_L
0	0
1	15
2	35
3	50
4	40
5	48

Q	TC
0	10
1	30
2	45
3	55
4	70
5	90
6	120

Q	TC
1	50
2	65
3	75
4	95
5	130
6	185

Q	TC
0	-
1	500
2	300
3	200
4	300
5	500
6	800

L	AP_L
1	2
2	3
3	4
4	4.25
5	4
6	3.5

NCERT Solutions