MICRO ECONOMICS

CHAPTER-1

INTRODUCTION

I. Choose the correct answer (each question carries 1 mark)

1. The scarce resources of an economy have

(a) Competing usages (b) Single usages
(c) Unlimited usages (d) none of the above
Ans: (a) Competing usages
2. Which of the following in an example of micro economic study?
(a) National income (b) Consumer Behaviour
(c) Unemployment (d) Foreign trade
Ans: (b) Consumer behaviour
4. Central problems of an economy includes
(a) What to produce (b) How to produce
(c) For whom to produce (d) All of the above
Ans: (d) All of the above
5. Traditionally, the subject matter of economics has been studied under the following
broad branches.
(a) Micro and macro Economics (b) Positive and Normative
(c) Deductive and Inductive (d) None of the above
Ans: (a) Micro and Macro Economics.
II. Fill in the blanks (each questions carries 1 marks)
1. Scarcity of resources gives raise to.....................
Ans: Problem of choice
2. In a centrally planned economy all important decisions are made by ………………
Ans: Government
3. …………. Is a set of arrangement where economic agents can freely exchange their
endowments with each other.
Ans: Market
4. In reality all economies are …………………..
Ans: Mixed Economies.
III. Match the following (each question carries 1 mark)

1. Market economy a. Government

2. Service of a Teacher b. Private
3. Centrally planned economy c. Skill
4. Positive economics d. Evaluate the Mechanism
5. Normative economics e. Functioning of Mechanism
Ans: 1-b; 2-c; 3-a; 4-e; 5-d;

IV. Answer the following questions in a sentence/word. (each question carries 1 mark)

1. Why does the problem of choice arise?

Ans: An economic problem arises because of limited resources and unlimited wants
and alternative uses of resources. To allocate limited resources to satisfy unlimited
wants the problem of choice arises.
 2. What is market economy?
Ans: A market economy also known as capitalistic economy is that economy in
which the economic decisions are undertaken on the basis of market mechanism by
the private entrepreneurs. It functions on demand and supply conditions. E.g, USA
3. What do you mean by centrally planned economy?
Ans: A planned economy also called as socialistic economy is that economy where
the economic activities are controlled by the central Government. Here, the
Government takes decisions about the allocation of resources in accordance with
objectives to attain economic and social welfare. Example, Vietnam,Russia, China,
North Korea etc.
4. Give the meaning of micro economics.
Micro economics is the study of the economic actions of individuals and small groups
of individuals.
5. What do you mean by positive economics?
The positive economics is the study of ‘what was’ and ‘what is’ under the given set of
circumstances. It deals with the scientific explanation of the working of the economy.
6. What is normative economics?
Ans: The Normative economics studies ‘what ought to be’. It explains about ‘what
should be and should not be done’.
V. Answer the following in 4 sentences. (each question carries 2 marks)

1. Mention the central problems of an economy.

Ans: The central problems of an economy are as follows:
a) What goods are to be produced and in what quantities?
b) How the goods are to be produced?
c) For whom the goods are to be produced?
2. Distinguish between Micro and Macro economics.
The micro and macro economics are distinguished on the following grounds:

Scope: Micro Economics study in individual units so its scope is narrow.

Macro Economics study in aggregates, so its scope is wider.

Method of study: The Micro Economics follows slicing method as it studies

individual unit.
The Macro Economics follows lumping method as it studies in
aggregates.
5. Distinguish between positive and normative economics.

Positive Economics Normative Economics

• The positive economics is the study • The Normative economics studies

of ‘what was’ and ‘what is’ under the ‘what ought to be’.
given set of circumstances. • It explains about ‘what should be
• It deals with the scientific and should not be done’.
explanation of the working of the • Here we try to understand that
economy. whether the mechanisms are
• Here we study how the different desirable or not.
mechanisms function.
 6. What do you mean by production possibility set?
Ans: The collection of all possible combinations of the goods and services that can be
produced from a given amount of resources and a given stock of technological
knowledge is called the production possibility set of the economy.
7. What is opportunity cost?
Ans: An opportunity cost is the cost of having a little more of one good in terms of
the amount of the other good that has to be forgone. This is known as the opportunity
cost of an additional unit of the goods.
8. What is production possibility frontier?
Ans: The production possibility frontier is a graphical representation of the
combinations of two commodities (cotton and wheat) that can be produced when the
resources of the economy are fully utilized. It is also called as Production possibility
curve (PPC) also known as transformation curve.

VI. Answer the following question in 12 sentences. (each question carries 4 mark)

1. Briefly explain how the family farm, weaver and Teacher can use their resources
to fulfill their needs in a simple economy.
Ans: People in the society need many goods and services in their everyday life
including food, clothing, shelter, transport facilities, postal services and various other
services like that of teachers and doctors. In fact, the list of goods and services that
any individual needs is so large that no individual in society has all the things he
needs.
Every individual has some amount of only a few of the goods and services that
he would like to use. A family farm may own a plot of land, some grains, farming
implements, may be a pair of bullocks and also the labour services of the family
members.
A weaver may have some yarn, some cotton and other instruments required
for weaving cloth.
The teacher in the local school has the skills required to impart education to
the students.
Each of these decision making units can produce some goods or services by
using the resources that it has and use part of the produce to obtain the many other
goods and services which it needs.
For instance, the family farm can produce corn, use part of the produce for
consumption purposes and procure clothing, housing and varios services in exchange
for the rest of the produce.
Similarly, the weaver can get the goods andservices that he wants in exchange
for the cloth he produces in his yarn. The teacher can earn some money by teaching
students in the school and use the money for obtaining the goods and services that he
wants.
Thus, each individual can use his resources o fulfill his needs. It is said that no
individual has unlimited resources compared to his needs. The quantity of corn that
 the family farm can produce is limited by the quantity of resources it has and hence
the amount of different goods and services that it can procure in exchange of corn is
also limited. As a result, the family is forced to make a choice between the different
goods and services that are available. It can have more of a good or service only by
giving up some amounts of other goods or services.

2. Briefly explain the production possibility frontier.

Ans: The production possibility frontier is a graphical representation of the
combinations of two commodities (cotton and wheat) that can be produced when the
resources of the economy are fully utilized. It is also called as Production possibility
curve (PPC) also known as transformation curve.
It gives the combinations of cotton and wheat that can be produced when the
resources of the economy are fully utilized. The production possibility frontier can be
explained with the help of following table.

Combination Cotton Wheat

A 10 0

B 8 1

C 5 2

D 2 3

E 0 4

In the above table, we can see that, if a country uses all its resources to grow cotton it
can grow 10 units, which is shown in combination A. Similarly, if all resources are
used to grow wheat, it can grow 4 units of wheat. If the resources are to be used for
both the commodities, the combinations of B, C or D can be chosen.

This can be graphically represented as follows:

A
cotton B
C
D

O Wheat
 As per the above graph, the combinations A to E lying on the production
possibility curve represent that a country can produce both the commodities with the
help of available resources technology. If the points lying strictly below the
production possibility curve represents a combination of cotton and wheat that will be
produced when all or some of the resources are either underemployed or are utilized
in a wasteful fashion.

3. Briefly explain the central problems of an economy.

Ans: An economic system or economy is a mechanism where the scarce resources are
channelized on priority to produce goods and services. These goods and services
produced by all the sectors of the economy determine the national income.
Generally, human wants are unlimited and resources to satisfy them are
limited. If there was a perfect match between human wants and availability of
resources there would have been no scarcity, no problem of choice and no economic
problems at all. So, one has to select the most essential want to be satisfied with
limited resources. In economics, this problem is called ‘Problem of Choice’.
The problem of choice arising out of limited resources and unlimited wants is
called economic problem. Every economy whether developed or underdeveloped,
Capitalistic or socialistic or mixed economy, there will be three basic economic
problems viz., What to produce, How to produce and For whom to produce. Let us
discuss in detail.

a) What to Produce i.e., what is to be produced and in what quantities:: Every

country has to decide which goods are to be produced and in what quantities.
Whether more guns should be produced or more foodgrains should be grown or
whether more capital goods like machines, tools, etc., should be produced or more
consumer goods (electrical goods, daily usable products etc.) will be produced.
What goods to be produced and in what quantity depends on the economic system
of the country. In socialistic economy, the Government decides and in Capitalistic
economy market forces decided and in mixed economy both the Government and
market forces provide solutions to this problem.
b) How to Produce i.e., how are goods produced?: There are various alternative
techniques of producing a product. For example, cotton cloth can be produced
with either handloom or power looms. Production of cloth with handloom
requires more labour and production with power loom use of more machines and
capital. It involves selection of technology to produce goods and services.
There are two types of techniques of production viz., (a) Labour intensive
technology and (b) capital intensive technology.
The society has to decide whether production be based on labour intensive or capital
intensive techniques. Obviously, the choice of technology would depend on the availability of
different factors of production (land, labour, capital) and their relative prices (rent, wages,
interest).
c) For whom to produce i.e., for whom are the goods to be produced: Another
important decision which an economy has to take is for whom to produce. The
economy cannot satisfy all wants of all the people. Therefore, it has to decide who
should get how much of the total output of goods and services. The society has to
decide about the shares of different groups of people- poor, middle class and the
rich, in the national output.
 Thus, every economy faces the problem of allocating the scarce resources to
the production of different possible goods and services and of distributing the
produced goods and services among the individuals within the economy. The
allocation of scarce resources and the distribution of the final goods and services are
the central problems of any economy.

4. Write a short note on a centrally planned economy.

Ans: A planned economy also called as socialistic economy is that economy where
the economic activities are controlled by the central Government. Here, the
Government takes decisions about the allocation of resources in accordance with
objectives to attain economic and social welfare. Example, Russia, China, North
Korea etc.
In a centrally planned economy, the basic economic problems are solved as
follows:
In centrally planned economy, the Government takes decisions about the allocation of
resources in accordance with the predetermined goals and objectives to attain
maximum social welfare. Government decides what to produce, how to produce and
what prices are to be fixed.
• Regarding what to produce, the Government may produce those goods and services
which are most useful for its society.
• Regarding how to produce, the most suitable technique in production is adopted whether
labour intensive or capital intensive in accordance with the situation in the economy.
• Regarding whom to produce, the goods and services are produced to those people who
are suffering from hunger though there is a loss.
• It gives importance to the quality of life rather than quantity of production.
• It focuses the resources on rapid economic development.

5. Write a short on market economy.

Ans: A market economy also known as capitalistic economy is that economy
in which the economic decisions are undertaken on the basis of market mechanism by
the private entrepreneurs. It functions on demand and supply conditions. In USA,
Japan, Autralia, UK and other countries we can see Market Economic systems.
In market economy, private individuals own the factors of production. Here,
the profit is the main goal of business. There is least intervention of Government.
Price mechanism plays a major role in market economy. It is a balancing
wheel of the market mechanism. Prices coordinate decisions of the producers and
consumers. The price is determined by demand and supply in the market. No
individual organization or Government is responsible for the production and
distribution or pricing of goods. All depend on market mechanism.
Regarding basic problems of an economy, the problem of what to produce is
solved on the basis of demand and profit. The producers produce those products
which bring more income.
The problem - how the goods are to be produced is determined by the
competition among different entrepreneurs. The select least cost combination of
technology so that they can get more returns with less cost.
 In market economy, the problem of whom to produce is decided on the basis
of purchasing power of consumers. The producers produce commodities to the rich as
they can afford to pay more but poorer sections of the society are neglected.
In Market economy, profits and losses play a predominant role in growth and
development of every producer.
 CHAPTER-2

CONSUMER BEHAVIOUR

I Choose the correct answer

1. Utility is
a) Objective c) Both a and b
b) Subjective d) None of the above
Ans: (b) Subjective
2. The shape of an Indifference curve is normally
a) Convex to the origin c) Horizontal
b) Concave to the origin d) Vertical
Ans: (a) Convex to the origin
3. The consumption bundle that are available to the consumer depend on
a) Colour and shape c) Income and quality
b) Price and income d) None of the above
Ans: (b) Price and income
4. The equation of Budget line is
a) Px+p1x1=M c) P1x1+p2x2=M
b) M=P0X0+Px d) Y=Mx+C
Ans: c) P1x1+p2x2=M
5. The demand for these goods increases as income increases
a) Inferior goods c) Normal goods
b) Giffen goods d) None of the above
Ans: (c) Normal goods
6. A vertical demand curve is
a) Perfectly elastic c) Unitary elastic
b) Perfectly inelastic d) None of the above
Ans: (b) Perfectly inelastic
7. Ordinal utility analysis expresses utility in
a) Numbers c) Ranks
b) Returns d) awards
Ans: (c) Ranks

II Fill in the blanks

1. Wants satisfying capacity of commodity is ……………….
Ans: Utility
2. Two indifference curves never ……………….. each other.
Ans: Intersect
3. As income increases, the demand curve for normal goods shifts
towards………………….
Ans: Rightward
4. The demand for a good moves in the …………………….direction of its price
Ans: Opposite
 5. Method of adding two individual demand curve is called as……………………
Ans: Horizontal summation

III Match the following

A B

1. Demand curve a) D(p)=a-bp

2. Linear Demand curve b) Downward sloping
3. Unitary elasticity of demand c) Pen and ink
4. Complementary goods d) A family of Indifference curve
5. Indifference map e) |ed|=1

Ans: 1-b; 2-a; 3-e; 4-c; 5-d;

IV Answer the following questions in a sentence or a word

1. What is budget line?
Ans: The line consists of all bundles of goods which cost exactly equal to the
money income of consumer is called budget line. It represents all bundles
which costs entire income of consumer. It slopes negatively.
2. What do you mean cardinal utility analysis?
Ans: When the utility is measured in numbers like 1,2,3,4…., it is called as
cardinal utility analysis. It was advocated by Prof.Alfred Marshall.
3. Give the meaning of marginal utility.
Ans: It is the additional utility derived by the consumer by consuming
additional unit of a commodity. It represents the utility of single unit. It may
be written as MU=TUn-TUn-1.
4. What is utility?
Ans: Utility refers to the want-satisfying power of a commodity or a service.
5. Expand MRS.
Ans: Marginal Rate of Substitution.
6. What do you mean by indifference curve?
Ans: Indifference curve shows the different combinations of two products in
which the consumer gets equal satisfaction.
7. What is demand?

Ans: The concept ‘demand’ refers to the quantity of a good or service that a
consumer is willing and able to purchase at various prices, during a period of
time. It includes desire for a commodity, ability to pay and willingness to pay.
V Answer the following in 4 sentences
1. What are the differences between budget line and budget set?

Budget Line Budget Set

• It is locus of different combinations • It is a collection of all bundles

of the two goods which the available to a consumer at the
consumer consumes and whose existing price at his given level of
price exactly equals his income. income.
• It is also known as Price line. • It is also known as opportunity set

2. What do you mean by inferior goods? Give example.

Ans: The inferior goods are those goods for which the demand increases with
the fall in income of consumer and vice-versa. That is, there will be a negative
relationship between income of consumer and demand for inferior goods. Here
the income of consumer and demand move in opposite directions.
Example: Low quality goods.

3. What is monotonic preference?

Ans: A consumer’s preferences are said to monotonic if and only if between
any two bundles, the consumer prefers the bundle which has more of at least
one of the goods and no less of the other good as compared to the other
bundle.
For instance, the consumer, between any bundles say (x1,x2) and (y1,
y2), if (x1,x2) has more of at least one of the goods and no less of the other
good compared to (y1, y2) then the consumer prefers (x1,x2) to (y1, y2). This is
called monotonic preferences.
Here the consumer will not remain indifferent between two
combinations of commodities when he has an opportunity to have more
quantity in one combination than the other.

4. State the law of demand?

Ans: Law of Demand states that other things being equal, there is a negative
relation between demand for a commodity and its price.
In other words, when price of the commodity increases, demand for it
falls and when price of the commodity decreases, demand for it rises, other
factors remaining the constant.
The law can be explained in the following manner: “Other things being equal,
a fall in price leads to expansion in demand and a rise in price leads to
contraction in demand”.
5. Mention two different approaches which explain consumer behavior.
Ans: The two approaches which explain consumer behaviour are:
a) Cardinal Utility Analysis – Law of Diminishing Marginal Utility
b) Ordinal Utility Analysis – Indifference Curve analysis
6. What do you mean price elasticity of demand?
 Ans: Price elasticity of demand is a measure of the responsiveness of the
demand for a good to changes in its price.
In the words of Prof. Stonier & Hague, “Price elasticity of demand is a
technical term used by economists to describe the degree of responsiveness of
the demand for a good to a change in its price.
It is measured by using the following formula.
PED = Percentage change in demand for the good
Percentage change in price of the good

VI Answer the following questions in 12 sentences

1. Write the differences between total utility and marginal utility.

Total Utility Marginal Utility

• It is the aggregate utility derived by • It is the additional utility

the consumer by consuming all the derived by the consumer by
units. consuming additional unit
• It represents utility of all the units • It represents the utility of single
consumed. unit.
• It may be symbolically written as
TUn=U1+U2+U3+U4………….Un. • It may be written as
• It increases in the beginning and later MUn=TUn-TUn-1.
decreases as the consumer consumes • It decreases from the beginning
more and more units. and becomes negative later.

2. Briefly explain the budget set with the help of a diagram.

Ans: The budget set is the collection of products that the consumer can buy
with his income at the prevailing market prices. The Budget set is also known
as opportunity set. It includes all the bundles (all possible combination of two
goods) which the consumer can purchase with his given level of income.
The budget equation can be written as follows:
P1X1 + P2 X2 ≤ M.
Consider, for example, a consumer who has Rs.20 and suppose, both
the goods are priced at Rs.5 and are available only in integral units. The
bundles that this consumer can afford to buy are; (0,0), (0,1), (0,2), (0,3),
(0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4,0).
Among these bundles, (0,4), (1,3), (2,0), (2,2), (3,1) and (4,0) cost
exactly Rs.20 and all the other bundles cost less than Rs.20.
If both the goods are perfectly divisible, the consumer’s budget set
would cosist of all bundles (x1,x2) such that x1 and x2 are any numbers greater
than or equal to 0 and P1X1 + P2 X2 ≤ M.
 The budget set can be represented in a diagram as follows:
Y

Mangoes

M/P2

P1X1 + P2 X2 =M.

O Banana M/P1 X

Quantity of bananas is measured along the horizontal axis and quantity

of mangoes is measured along the vertical axis. Any point in the diagram
represents a bundle of the two goods. The budget set consists of all points on
or below the straight line having the equation P1X1 + P2 X2 =M.

3. Explain the derivation of slope of the budget line.

Ans: The slope of the budget line measures the quantity of change in one
product required per unit of change in another product along the budget line.
For example, the amount of change in mangoes required per unit of
change in bananas along the budget line is the derivation of slope of the
budget line. It can be represented in diagram as follows:
Y

Mangoes

M/P2

(x1,x2)

∆x2

(x1 + ∆x1, x2+∆x2)

∆x1

O Banana M/P1 X
 The absolute value of the slope of the budget line measures the rate at
which the consumer is able to substitute bananas for mangoes when she
spends her entire budget.
Let us consider two points (x1,x2) and (x1 + ∆x1, x2+∆x2) on the budget
line. It will be as follows:

P1X1 + P2 X2 =M……………..(1)

P1 (x1 + ∆x1) + P2( x2+∆x2)=M …………(2)

Now subtracting (1) from (2), we get

P1∆x1+ P2∆x2=0…………….(3)

By rearranging terms in (3) we get

∆x2/∆x1 = -P1/P2 ....................(4).

Therefore, the slope of the budget line is -P1/P2. The means, the Indifference curve is
negatively sloped i.e., it slope downwards. An increase in the amount of bananas along the
indifference curve is associated with a decrease in the amount of mangoes.

4. Explain the indifference map with the diagram.

Ans: A family of indifference curves is called as indifference map. It refers to
a set of indifference curves for two commodities showing different levels of
satisfaction. The higher indifference curves show higher level of satisfaction
and lower Indifference Curve represent lower satisfaction. A rational
consumer always chooses more of that product that offers him a higher level
of satisfaction which is represented in higher Indifference Curve. It is also
called ‘Monotonic preferences’.
The consumer’s preferences over all the bundles can be represented by
a family of indifference curves as shown in the following diagram.

Y
Mango

O Banana X
 In the above diagram, we see the group of three indifference curves showing
different levels of satisfaction to the consumer. The arrow indicates that
bundles on higher indifference curves are preferred by the consumer to the
bundles on lower indifference curves.

5. Write the differences between substitutes and complements.

Substitute goods Complementary goods

• These are alternative goods • These are the goods which are
available to satisfy our wants. consumed together.
• If the price of a product • If the price of a product increases,
increases, the demand for its the demand for its
substitute also increases. complementary good decreases.
• Example for substitute goods • Example for complementary
are Tea and Coffee, Colgate and goods are Pen and Ink, Shoes and
Pepsodant, etc. socks etc
• Here the demand curve shifts to • Here the demand curve shifts to
the right in case of price rise. left in case of price rise.
• Price and demand move in same • Price and demand move in
direction. opposite directions.

6. Explain the differences between normal and inferior goods with examples.
Normal goods Inferior goods

• These are the goods for which • These are the goods for which the
the demand increases with the demand decreases with the
increase in the income of increase in the income of
consumer. consumer.
• Example for normal goods are • Example for inferior goods are
food, cloths, electronic goods, low quality of goods like
luxury goods etc. unbranded products.
• There is positive relationship • There is inverse relationship
between income and demand. between income and demand.
• Here the demand curve shifts • Here the demand curve shifts
towards right if the income of towards left if the income of
consumer increases. consumer increases.
 VII Answer the following questions in 20 sentences
1. Explain the law of diminishing marginal utility with the help of a table
and diagram.

One of the most important propositions of the cardinal utility approach to

demand was the Law of Diminishing Marginal Utility. German Economist Gossen
was the first to explain it. Therefore, it is called Gossen’s First Law.

Definition:

According to Alfred Marshall, “The additional benefit which a person derives from a
given increase of a stock of a thing diminishes, other things being equal, with every
increase in the stock that he already has”.

This law simply tells us that, we obtain less and less utility from the
successive units of a commodity as we consume more and more of it.

ASSUMPTIONS OF THE LAW OF DMU

a) Uniform quality and size of the commodity: The Successive units of the commodity
should not differ in any way either in quality or size.
b) Suitable quantity of consumption: The commodity units should notk be very small;
Eg. Milk should be in glasses and not in spoons.
c) Consumption within the same time: Consumption must be continuous. There should
not be so much difference in time between the consumption of successive units.
d) No change in the price of the commodity or its substitutes: The law is based on the
assumption that the commodity’s price is not changes with successive units. The
price of the substitutes is also kept at the same level.
e) Utility can be measured in cardinal numbers i.e., 1, 2, 3, 4, …….
f) Consumer must be rational, i.e., every consumer wants to maximize his satisfaction.

Explanation of Law of Diminishing Marginal Utility:

The basis of this law is that every want needs to be satisfied only upto a limit.
After this limit is reached the intensity of our want becomes zero. It is called
complete satisfaction of the want. Therefore, s we consume more and more units of a
commodity to satisfy our need, the intensity of our want for it becomes less and less.
Therefore, the utility obtained from the consumption of every unit of the commodity
is less than that of the units consumed earlier. This can be explained with the help of
the following table. TU- Total Utility, U- Marginal Utility.

Units of TU MU
Apples

1 30 30

2 50 20
 3 65 15

4 75 10

5 80 5

6 82 2

7 82 0

8 80 -2

Suppose a man wants to consume apples and is hungry. In this condition, if he

gets one apple, he has very utility for it. Let us say that the measurement of this utility
is equal to 30 utils. Having eaten the first he will not remain so hungry as before.
Therefore, if he consumes the second apple he will have a lesser amount of utility
from the second apple even if it was exactly like first one. The utility he got from the
second apple equals 20 units, the third, fourth, fifth and sixth apples give him utility
equal to 15, 10, 5 and 2 units respectively. Now, if he is given the seventh apple he
has no use for it. That means the utility of the seventh apple to the consumer is zero.
It is just possible that if he is given the eight apple for consumption, it may harm him.
Here the utility will be negative ie., -2. Therefore, we are clear that the additional
utility of the successive apples to the consumer goes on diminishing as he consumes
more and more of it.

The Law of Diminishing Marginal Utility can be explained with the help of
the following diagram.

Y T (highest utility)

TU

Initial Utility

Utility

Satiety

No. of Apples MU

Negative Utility
 In the diagram the horizontal axis shows the units of apples and the vertical
axis measures the MU and TU obtained from the apple units. The total utility Curve
will be increasing in the beginning and later falls. The Marginal Utility curve is
falling from left down to the right clearly tells us that the satisfaction derived from the
successive consumption of apples is falling.

The Marginal Utility of the first apple is known as initial utility. It is 30 utils.
The Marginal utility of the seventh apple is Zero. Therefore, this point is called the
satiety point. The Marginal Utility of the eighth apple is -2. So, it is called Negative
utility and lies below the X axis.

2. Explain the features of Indifference curves with the help of diagrams.

Ans: The main features of Indifference curves are as follows:
a) Indifference curve slopes downwards from left to right: An
indifference curve slopes downwards from left to right because, the
consumer in order to have more of one product, he has to forego some
units of other product. This can be explained with the help of diagram.

Mangoes

(x1,x2)

∆x2

(x1 + ∆x1, x2+∆x2)

∆x1

O Banana X

Thus, according to above diagram, as long as the consumer is on the same

indifference curve, an increase in bananas must be compensated by a fall
in quantity of mangoes. That means, an increase in the amount of bananas
along the indifference curve is associated with a decrease in the amount of
mangoes.
b) Higher indifference curve gives greater level of utility: As long as
marginal utility of a commodity is positive, a consumer always prefers
 more of that commodity to increase his level of satisfaction. This can be
explained with the help of table and a diagram:
Combination Banana Mango

A 1 10

B 2 10

C 3 10

Y
Mango

10 A B C
IC3

IC2
IC1
O 1 2 3 Banana X
Let us consider the different combinations of two goods bananas and
mangoes A, B and C in the above table and diagram. All the three
combinations consist of same quantity of mangoes but different quantities of
bananas. As combination B has more bananas than A, B will provide the
consumer higher level of satisfaction than A. Therefore, B will lie on higher
indifference curve. Similarly, C has more bananas than B and therefore C will
provide higher level of satisfaction than B and also lie on higher indifference
curve than B.
Thus higher indifference curves give greater level of utility.
c) Two indifference curves never intersect each other: If the two
indifference curves intersect each other, they will give conflicting results.
This can be explained with the help of diagram.

Mango

B IC2

C IC1

O Banana X
 In the above diagram the two indifference curves have
intersected with each other. As points A and B lie on IC2, utilities derived from A and
B are same. Similarly, as points A and C lie on the same indifference curve IC1, the
utilities are same. From this, it follows that utility from point B and C are same. But
this is clearly an absurd result as on B, the consumer gets a greater number of
mangoes with the same quantity of bananas. So the consumer is better off at point B
than at Point C. Thus, it is clear that intersecting indifference curves will lead to
conflicting results. Thus, two indifference curves cannot intersect each other.

3. Explain the optimal choice of consumer with the help of diagram.

It is assumed that the consumer chooses her consumption bundle on
the basis of her taste and preferences over the bundles in the budget set. It is
generally assumed that the consumer has well defined preferences over the set
of all possible bundles. She can compare any two bundles. In other words,
between any two bundles, she either prefers one to the other or she is
indifferent between the two goods.
It is further assumed that the consumer is a rational individual. A
rational individual clearly knows what is good or what is bad for her and in
any given situation, she always tries to achieve the best for herself. From the
bundles which are available to her, a rational consumer always chooses the
one which gives her maximum satisfaction. The consumer always tries to
move to a point on the highest possible indifference curve given her budget
set.
Thus, the optimum point would be located on the budget line. A point
below the budget line cannot be the optimum. Compared to a point below the
budget line, there is always some point on the budget line which contains more
of at least one of the goods and no less of the other. Thus, the consumer’s
preferences are monotonic.
The point at which the budget line is tangent to one of the indifference
curves would be the optimum choice of consumer. This is because, the budget
line other than the point at which it touches the indifference curves lies on a
lower indifference curve is considered as inferior. So such a point cannot be
the consumer’s optimum. The optimum bundle is located on the budget line at
the point where the budget line is tangent to an indifference curve.
This can be explained with the help of the following diagram.
Y
P
(x1,x2)
Mango

IC3
IC2
IC1
O Banana Q X
 In the above diagram, PQ is budget line, IC1, IC2 and IC3 are
indifference curves showing different levels of satisfaction. Banana is
measured in OX axis and Mango is measured in OY axis.
The above diagram illustrates the consumer’s optimal choice also known
as consumer’s equilibrium. At (x1,x2), the budget line PQ is tangent to the
indifference curve IC2. The indifference curve just touching the budget line is
the highest possible indifference curve given the consumer’s budget set.
Bundles on the indifference curve above IC2 are not affordable. Points on the
indifference curve IC2 are certainly inferior to the points on the IC2 as they lie
on IC1. Therefore, (x1,x2) is the consumer’s optimum bundle.

4. Explain the movement along the demand curve and shift in demand curve
with the help of two diagrams.
It is important to note that the amount of a good that the consumer chooses
depends on the price of the good, the prices of other goods, income of the
consumer and her tastes and preferences. The demand function is a relation
between the amount of the good and its price when other things remain
constant.
The demand curve is a graphical representation of the demand
function. At higher prices, the demand is less and at lower prices, the demand
is more. Thus, any change in the price leads to movements along the demand
curve.
On the other hand, changes in any of the other things like, income of
consumer, price of related goods (substitutes and complementary goods) and
tastes and preferences, lead to a shift in the demand curve. The following two
diagrams depict the movement along the demand curve and a shift in the
demand curve.

Y
Y (a) D D1 (b)

Price
Price

D
D1

O quantity X O quantity
X
 The above diagrams show movement along a demand curve and shift of a
demand curve. Diagram (a) depicts a movement along the demand curve and diagram
(b) depicts a shift in the demand curve.

5. Explain the market demand with the help of diagrams.

Ans: The market demand for a good at a particular price is the total demand
for all consumers taken together. The market demand for a good can be
derived from the individual demand curves. Suppose there are two consumers
in the market. The market demand curve can be explained in with the help of
following diagrams:

Y Y D2
D1 price price

P P P
P1
P1 P1
D1 D2
DM

O q1 q1’ O q2 q2’ O q1+q2

q1’+q2’
quantity
In the above diagrams D1 is demand curve of consumer 1 and D2 is
the demand curve of Consumer 2. Suppose at price P the demand of consumer 1
is ‘q1’ and that of consumer 2 is ‘q2’ then the market demand of the good at P is
q1+q2.
Suppose at price P1, the demand of consumer is 1 is q1’ and that of
consumer 2 is q2’. Then the market demand at P1 will be q1’+q2’. So the market
demand curve can be derived as a horizontal summation of the individual demand
curves.
Thus, the market demand for the good at each price can be derived by adding
up the demands of the two consumers at that price. If there are more than two
consumers in the market for a good, the market demand can be derived similarly.
 VIII Assignment and project-oriented question
1. A consumer wants to consume two goods. The Price of bananas is Rs.5
and price of mangoes is Rs.10. The consumer income is Rs.40.
a) How much bananas can she consume if she spends her entire income
on that good
b) How much mangoes can she consume if she spends her entire income
on that good
c) Is the slope of budget line is downward or upward?
d) Are the bundles on the budget line equal to the consumers’ income or
not?
e) If you want to have more of banana you have to give up mangoes. Is it
true?

Ans: (a) 8 Bananas (40/5)

(b) 4 Mangoes (40/10)

(c) Slope of budget line is downward.

(d) Yes, the bundles on the budget line are equal to the consumer’s income.

(e) True. If we want to have more of banana we have to give up mangoes.

******
 CHAPTER 3

PRODUCTION AND COST

I Choose the correct answer

1. The formula of production function is

a) q=f(L,K) c) Y=f(x)
b) q=d(p) d) None of the above.
Ans: (a) q=f(L,K)

2. In the short run, a firm

a) Can change all the inputs c) can keep inputs fixed
b) Cannot vary all the inputs d) None of the above
Ans: (b) Cannot vary all the inputs

3. The change in output per unit of the change in the input is called
a) Marginal product c) Total product
b) Average Product d) Product
Ans: (a) Marginal product

4. Cobb-Douglas production function is

a) q=(x, x) c) q= (x1α, x2β)
b) q=(x1, x2) d) q=(0)
Ans: c) q= (x1 , x2β)
α

5. TC=
a) TVC c) TFC+TVC
b) TFC d) AC + MC
Ans: c) TFC+TVC

II Fill the blanks

1. In the long run, all inputs are ……………
Ans: Varied
2. …………..is defined as the output per unit of variable input.
Ans: Average Product
3. Marginal product and average product curves are …………in shape.
Ans: Inverse U
4. SMC curves cuts the AVC curve at the …………point of AVC curve from below.
Ans: Minimum
5. …………….is the set of all possible combinations of the two inputs that yield the
same maximum possible level of output.
Ans: Isoquant
III Match the following

A B

1. CRS a) ΔTC/ΔC
2. SAC b) Long run Average cost
3. LRAC c) Short run Average cost
4. TFC+TVC=
d) Constant returns to scale
5. SMC
e) TC

Ans: 1 - (d); 2 - (c); 3 - (b); 4 – (e); 5 – (a)

IV Answer the following questions in a sentence or word

1. What do you meant by total product?

Ans: Total product is the relationship between a variable input and output when all
other inputs are held constant.
Suppose we vary a single input and keep all other inputs constant. Then for
different levels of that input, we get different levels of output. This relationship
between the variable input and output, keeping all other inputs constant, is often
referred to as Total Product of the variable input.
2. What is Average product?
Ans: Average Product is defined as the output per unit of variable input. We calculate
it as APL=TPL/L.
3. Give the meaning of 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. It is the additional unit of
output per additional unit of variable input. It is calculated by dividing the change in
output by change in input labour.
MPL = ∆TPL/∆L.
4. Write the meaning of cost function of the firm.
Ans: The cost function of the firm describes the least cost of producing each level of
output, given prices of factors of production and technology. It deals with the output
and prices of factors of production.
5. What is total fixed cost?
Ans: The cost that a firm incurs to employ fixed factors of production (inputs) is
called as Total Fixed Cost.
6. What is average fixed cost?
Ans: Average fixed cost is the cost per unit of fixed input. It is obtained by dividing
the values of the Total Fixed cost by output. The formula to calculate Average Fixed
cost is
AFC = TFC/q.
 V Answer the following questions in four sentences.

1. What is Isoquant?
Ans: An isoquant is the set of all possible combinations of the two inputs that yield
the same maximum possible level of output. Each isoquant represents a particular
level of output and is labelled with that amount of output. It is just an alternative way
of representing the production function.
2. Give the meaning of the concepts of short run and long run.
Ans: The concepts of short run and long run are defined as a period simply by looking
at whether all the inputs can be varied or not. It is not advisable to define short run
and long run in terms of days, months or years.
In the short run, at least one of the factor – labour or capital cannot be varied
and therefore, remains fixed. In order to vary the output level, the firm can vary only
the other factor. The factor that remains fixed is called the fixed factor and the other
factor which the firm can vary is called the variable factor.
In the long run, all factors of production can be varied. A firm in order to
produce different levels of output in the long run may vary both the inputs
simultaneously. So, in the long there is no fixed factor.
3. Mention the types of returns to scale.
Ans: The types of returns to scale are
(a) Constant Returns to Scale
(b) Increasing Returns to Scale
(c) Decreasing Returns to Scale
4. Name the short run costs.
Ans: The short run costs are: Total Fixed cost, Total Variable cost, Total Cost,
Average Fixed Cost, Average Variable Cost, Average Cost and Marginal Cost.
5. What are long costs?
Ans: There are two long run costs namely, (a) Long run Average Cost (b) Long run
Marginal Cost.

VI Answer the following questions in 12 sentences.

1. Explain isoquant with the help of a diagram.

Ans: An isoquant is the set of all possible combinations of the two inputs that yield
the same maximum possible level of output. Each isoquant represents a particular
level of output and is labelled with that amount of output. It is just an alternative way
of representing the production function.
 The concept of isoquant can be explained with the help of following diagram:

Capital

K2

K1
q=q3
q=q2
q=q1
O L1 L2 L3 Labour X
The above diagram generalizes the concept of isoquant. In the above
diagram, labour is measured in OX axis and Capital is measured in OY axis. There
are 3 isoquants for the three output levels viz., q=q1, q=q2 and q=q3. Two input
combinations (L1, K2) and (L2, K1) give us the same level of output q1. If we fix
capital at K1 and increase labour to L3, output increases and we reach a higher
isoquant q=q2. When Marginal products are positive, with greater amount of one
input, the same level of output can be produced only using lesser amount of the other.
Therefore, isoquants curves slope downwards from left to right (negatively sloped).
2. Explain TP, MP and AP with the example.
Ans: The TP – total product, MP- marginal product and AP – Average Product
Total Product:
Total product is the relationship between a variable input and output when all other
inputs are held constant. Suppose we vary a single input and keep all other inputs
constant. Then for different levels of that input, we get different levels of output. This
relationship between the variable input and output, keeping all other inputs constant,
is often referred to as Total Product of the variable input.
Average product
Average Product is defined as the output per unit of variable input. We calculate it as
APL=TPL/L, where APL is the Average Product of Labour, TPL is the Total product of
labour and L is the amount of labour input used.
Marginal Product
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. It is the additional unit of output per
additional unit of variable input. It is calculated by dividing the change in output by
change in input labour.
MPL = ∆TPL/∆L.
 The concepts of TP, AP and MP can be explained with the help of following
table:

Labour TP MPL APL

0 0 - -
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

The above table shows the total product of labour, Marginal product of labour
and Average product of labour. The total product is also sometimes called as total
return to or total physical product of the variable input labour. The third column gives
us a numerical example of Marginal product of labour. The values in this column are
obtained by dividing change in TP by change in Labour. The last column gives us a
numerical example of average product of labour. The values in their column are
obtained by dividing TP by Labour.
3. Write a brief note on returns to scale.
Ans: The returns to scale can happen only in the long run as both the factors (Labour
and Capital) can be changed. One special case in the long run occurs when both
factors are increased by the same proportion or factors are scaled up.
• Constant returns to scale: When a proportional increase in all inputs results
in an increase in output by the same proportion, the production function is said
display constant returns to scale.
• Increasing returns to scale: When proportional increase in all inputs results
in an increase in output by a larger proportion, the production function is said
to display increasing returns to scale.
• Decreasing returns to scale: When a proportional increase in all inputs
results in an increase in output by a smaller proportion, the production
function is said to display decreasing returns to scale.
For example, if in a production process, all inputs get doubled. As a
result, if the output gets doubled, the production function exhibits constant
returns to scale, if output is less than doubled, exhibits decreasing returns to
scale and if is more than doubled, exhibits increasing returns to scale.
4. Explain the long run costs.
Ans: In the long run, all inputs are variable. There are no fixed costs, The total cost
and the total variable cost coincide in the long run. There are two types of long run
costs. They are as follows:
a) Long Run Average Cost (LRAC): The long run average cost is the cost per unit
of output produced. It is obtained by dividing the Total Cost by the output
produced. It can be calculated as follows:
 LRAC = TC/q
Where TC is Total cost and ‘q’ is quantity of output produced.
b) Long Run Marginal Cost: The long run marginal cost is the change in total cost
per unit of change in output. When output changes in discrete units, then, if we
increase production from q1-1 to q1 units of output, the marginal cost of producing
q1th unit will be measured as follows:
LRMC = (TC at q1 units) – (TC at q1-1 units) or LRMC = TCn – TCn-1
5. The following table gives the TP schedule of labour. Find the corresponding
Average product and marginal product schedules.
TPL 0 15 35 50 40 48

L 0 1 2 3 4 5

Ans: Calculation of Average Product (AP) and Marginal Product (MP). AP is

obtained by dividing TPL by Labour (L) and MP is obtained from TPL with the help
of formula TCn – TCn-1
TPL L AP MP

0 0 0 -

15 1 15 15

35 2 17.5 20

50 3 16.66 15

40 4 10 -10

48 5 9.6 8

VII Answer the following questions in 20 sentences.

1. Explain the various short run costs.
The various short run costs are Total Cost, Total Fixed Cost, Total Variable Cost,
Average Cost, Average Fixed Cost, Average Variable Cost, and Marginal Cost. The
following table shows the various types of short run costs:
a) Total Fixed Cost (TFC):
It refers to the total money expenses incurred on all the fixed factors in the short
run. TFC remains constant at all levels of output. Therefore the total fixed cost
curve is horizontal straight line to OX axis above the origin which indicates that
it is never zero.
TFC = TC-TVC

b) Total Variable Cost (TVC):

It refers to the total money expenses incurred on the variable factor inputs
in the short-run. Total variable cost is the direct cost of the output because it
increases along with the output & remains zero when the output is zero. So, the

TVC = TC-TFC
 TVC curves starts from the origin & rises sharply in the beginning, gradually in
the middle & stretch again sharply in the end the nature of this slope is in
accordance with the law of variable proportion.

c) Total Cost (TC):

It is the aggregate money expenditure incurred by the firm on all the
factors to produce a given quantity of output. TC varies in the same proportion
as total variable cost because the total fixed cost is constant. The TC curve slope
upwards from left to right, above the origin, indicating that, it includes total fixed
cost and total variable cost.

d) Average Fixed Cost (AFC):

It is the fixed cost per unit of output. In other words, it is average expenses
incurred on a single unit of output produced. AFC and output are inverse relation
i.e. AFC will be higher when the output level is less and as the output goes on
increasing AFC starts reducing, when it is represented in the diagram AFC curve
will have a negative slope which falls very stiffly in the beginning and later on
becomes parallel to the X axis. .
The Average Fixed Cost is obtained by dividing Total Fixed Cost by Output.
AFC=TFC/Output.

e) Average Variable Cost (AVC):

It is a variable cost for per unit of output. It can be calculated by dividing
total variable cost by the total units of output. When this cost is graphically
represented, we get a ‘U’ shaped AVC, which shows that the cost will be less as the
number of units produced increase, this is because as the number of variable inputs
are added in a fixed plant the efficiency will increase and vice versa.

AVC=TVC/Output or AVC=AC-AFC

f) Average Cost (AC): It is the cost per unit of output produced. It is obtained by dividing
total cost by the total output produced i.e. AC = TC/Q or it is also obtained by adding AFC
& AVC. If the AC is graphical represented we get U shaped curve because of the operation
of law of variable proportions. The short run AC curve is also called as ‘Plant Curves’
because it indicates the optimum utilization of a given plant (Industry) capacity.
g) Marginal Cost (MC): It is an additional cost incurred to produce an additional output. In
other words it is the net additions to the total cost when one more unit of output is
produced.
MC = TCn-TCn-1

(Where TCn = Total Cost of ‘n’ selected unit of output and TCn-1 is Total cost of
previous output)

2. Explain the shapes of long run cost curves.

Ans: In the long run, all inputs are variable. There are no fixed costs, The total cost
and the total variable cost coincide in the long run. There are two types of long run
costs. They are as follows:
c) Long Run Average Cost (LRAC): The long run average cost is the cost per unit
of output produced. It is obtained by dividing the Total Cost by the output
produced. It can be calculated as follows:
LRAC = TC/q
Where TC is Total cost and ‘q’ is quantity of output produced.
In a typical firm the Increasing Returns to scale is 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. Accordingly, the LRAC curve is ‘U’ shaped
curve. Its downward sloping part corresponds to Increasing Returns to Scale and
upward rising part corresponds to Decreasing Returns to scale. At the minimum
point of the LRAC curve, Constant returns to scale is observed.
d) Long Run Marginal Cost: The long run marginal cost is the change in total cost
per unit of change in output. When output changes in discrete units, then, if we
increase production from q1-1 to q1 units of output, the marginal cost of producing
q1th unit will be measured as follows:
LRMC = (TC at q1 units) – (TC at q1-1 units) or LRMC = TCn – TCn-1
For the first unit of output, both LRMC and LRAC are the same. Then, as
output increases, LRAC initially falls, and then, after a certain point, it rises. As long
as average cost is falling, marginal cost must be less than the average cost. When the
average cost is rising, marginal cost must be greater than the average cost. LRMC
curve is there a ‘U’ shaped curve. It cuts the LRAC curve from below at the minimum
point of LRAC. The following diagram shows the shapes of the long run marginal and
the long run average cost curves for a typical firm.

LRMC
Y
Cost
LRAC
M

X
O q1 output
In the above diagram, LRAC reaches its minimum at q1. To the left of q1,
LRAC is falling and LRMC is less than the LRAC curve. To the right of q1, LRAC is
rising and LRMC is higher than LRAC.
3. Explain the shapes of TP, MP and AP curves.
Ans: Total Product(TP):
Total product is the relationship between a variable input and output when all other
inputs are held constant. Suppose we vary a single input and keep all other inputs
constant. Then for different levels of that input, we get different levels of output. This
relationship between the variable input and output, keeping all other inputs constant,
is often referred to as Total Product of the variable input.
The total product curve in the input-output plane is a positively sloped curve
as follows: Y
Output
TPL
q1

O L Labour X
The above diagram shows the total product curve for labour. When all other
inputs are held constant, it shows the different output levels obtainable from different
units of labour.
Labour is measured in OX axis and output is measured in OY axis. With L
units of labour, the firm can at most produce q1 units of output.

Average product (AP) and Marginal Product (MP):

Average Product is defined as the output per unit of variable input. We calculate it as
APL=TPL/L, where APL is the Average Product of Labour, TPL is the Total product of
labour and L is the amount of labour input used.
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. It is the additional unit of
output per additional unit of variable input. It is calculated by dividing the change in
output by change in input labour.
MPL = ∆TPL/∆L.
According to the law of variable proportions, the marginal product of an input
initially rises and then after a certain level of employment, it starts falling. The MP
curve therefore, looks like an inverse ‘U’ shaped curve.
For the first unit of the variable input, one can easily check that the MP and
the AP are same. As the amount of input is increased, the MP rises. AP being the
average of marginal products also rises, but rises less than MP. Then after a point, the
MP starts falling. However, as long as the value of MP remains higher than the value
of the AP, the AP continues to rise. Once MP has fallen sufficiently, its value
 becomes less than the AP and the AP also starts falling. So AP curve is also inverse
‘U’ shaped.
This can be diagrammatically represented as follows:

Y P
Output

MPL APL

O L Labour X
In the above diagram, MPL is marginal product of labour, APL is the
average product labour. As long as the AP increases, it must be the case that MP is
greater than AP. Otherwise, AP cannot rise. Similarly, when AP falls, MP has to be
less than AP. It follows that MP curve cuts AP curve from above at its maximum. In
the diagram, AP is maximum at L. To the left of L, AP is rising and MP is greater
than AP. To the right of L, AP is falling and MP is less than AP.

4. A firm’s SMC schedule is shown in the following table. TFC is Rs.100. find TVC,
TC, AVC and SAC schedules of the firm
Q 0 1 2 3 4 5 6

SMC - 500 300 200 300 500 800

Ans:
Q SMC TFC TVC TC AVC SAC

0 - 100 0 100 0 0

1 500 100 500 600 500 600

2 300 100 800 900 400 450

3 200 100 1000 1100 333.33 366.66

4 300 100 1300 1400 325 350

5 500 100 1800 1900 360 380

6 800 100 2600 2700 433.33 450

Note: TFC is given. TVC is obtained by adding SMC for each unit of output like 500
as it is taken, then 500+300=800; 800+200(SMC)=1000 and so on. TC is TFC+TVC,
AVC is TVC divided by Q; and SAC is TC divided by Q.
5. Explain the law of variable proportions with the help of a diagram.
Ans: The law of variable proportions say that the Marginal product of a factor input
initially rises with the employment level. But after reaching a certain level of
employment, it starts falling.
The law of variable proportions can be explained with the help of the
following table and diagram.

Labour TP MPL APL

0 0 - -
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

The above table shows the total product of labour, Marginal product of labour
and Average product of labour. The total product is also sometimes called as total
return to or total physical product of the variable input labour. The third column gives
us a numerical example of Marginal product of labour. The values in this column are
obtained by dividing change in TP by change in Labour. The last column gives us a
numerical example of average product of labour. The values in their column are
obtained by dividing TP by Labour.
If we plot the above table in graph, placing labor on X axis and output on Y
axis, we get the curves shown in the diagram below:

Y TP
Output

AP
MP X
 O Labour
The TP increases as labour input increases. But the rate at which it increases is
not constant. An increase in labour from 1 to 2 increases TP by 10 units. An increase
in labour from 2 to 3 increases TP by 12 units. The rate at which TP increases is
shown by the MP. The MP first increases (till 3 units of labour) and then begins to
fall. This tendency of the MP to first increase and then fall is called the law of
variable proportions.
The law of variable proportions is also known as law of diminishing marginal
product. It occurs because of change in factor proportions. Factor proportions
represent the ratio in which the two inputs are combined to produce output. As we
hold one factor fixed and keep the other increasing, the factor proportions change.
Initially, as we increase the amount of the variable input, the factor proportions
become more and more suitable for the production and marginal product increases.
But after a certain level of employment, the production process becomes too crowded
with the variable input.
In the above diagram, TP is Total Product curve which is increasing in
different proportions due the change in labour input. The AP and MP curves are
increasing in the beginning and decreasing later. But the change in MP is greater than
AP.

VIII Assignment and project oriented questions.

1. Find the missing products of the following table.

Factor 1 TP MP1 AP1

0 0 0 0

1 10 - 10

2 24 - 12

3 40 16 13.33

4 - 10 -

5 - 6 11.2

6 57 1 9.5
Ans:
Factor 1 TP MP1 AP1

0 0 0 0

1 10 10 10

2 24 14 12

3 40 16 13.33

4 50 10 12.5

5 56 6 11.2

6 57 1 9.5