Std 11

STD 11 Commerce Economics Total Marks : 260

Notes

SECTION A

* Given Section consists of questions of 3 marks each. [60]

1. Let the production function of a firm be Q = 2L2 K 2 Find out the maximum

possible output that the firm can produce with 5 units of L and 2 units of K.
What is the maximum possible output that the firm can produce with zero
unit of L and 10 units of K?
Ans. :
a. Q = 2L2K 2…………… (1)
L = 5 units of labour K = 2 units of capital

Putting these values in equation (1) Q = 2 (5)2 (2)2 = 2 (25) (4)

Q = 200 units
b. If L = 0 units and K = 100 units
Putting these values in equation (1) Q = 2 (0)2 (100)2 Q = 0 units

2. Why is a production possibilities curve concave? Explain.

Ans. : The PP curve being concave means that MRT increases as we move downwards
along the curve.
MRT increases because it is assumed that no resource is equally efficient in production of
all goods As resources are transferred from one good to another less and less efficient
resources have to be employed. This raises cost and raises MRT.

3. From the following table find out the phase during which there are increasing
returns to a factor.
Give reasons for your answer:
Units of Variable Factors 1 2 3 4 5
AP (units) 20 24 28 29 28

Ans. : Increasing returns to a factor represents that with increase in units of variable
inputs MP increases.

AP (units) TP (units) MP (units)

20 20 20
24 48 28

28 84 36

29 116 32

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 28 140 32

80 16 4

In the given schedule, MP increases till 3rd unit, hence increasing returns to a factor will be
there till 3rd unit of variable input.

4. Why is AR always equal to MR for a competitive firm?

Ans. : Under perfect competition, price is given to a firm as determined by the market
forces of demand and supply in the industry. Constant price implies constant AR. Constant
AR implies constant MR under perfect competition. So, AR = MR as shown in the diagram:

5. Why is Production Possibilities Curve concave? Explain.

Ans. :
A typical PP curve is downward sloping and concave, i.e. its slope is increasing, because
marginal Rate of Transformation (MRT) increases as we move downwards along the curve.
MRT increases because no resource is equally efficient in production of all goods. As the
resources are transferred from one good to another MRT increases because less and less
efficient resources are to be transferred each time.

6. What is meant by returns to a factor? State the law of diminishing returns to

a factor.
Ans. : Change in total physical product, when an additional unit of a variable factor
is employed with fixed factors, is called returns to a factor.
As more and more units of variable factor are used with fixed factors, after a certain level,
its marginal physical product decreases with further employment of it. This is the law
of diminishing returns to a factor.

7. Why should MC be rising at the point of equilibrium? OR Equilibrium is never

struck in a situation of falling MC. Why?

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 Ans. : Falling MC means that the cost of producing an additional unit of output tends to
reduce. In a situation, when price is constant (as under perfect competition) this would
mean a situation when the difference between the firm's TR (EMR) and TVC (EMC) tends to
increase. This means a situation when firm's gross profit (TR - TVC) tends to rise. So, this
will motivate the producer to produce more. Therefore, equilibrium is never struck in a
situation of falling MC.

8. Distinguish between explicit cost and implicit cost and give examples.

Ans. : Explicit cost refers to the actual purchase of inputs, or, actual money expenditure
on inputs.
Example: Expenditure on buying raw materials.
Implicit cost refers to the estimated value of the inputs provided by the owner.
Example: Estimated salary of the owner.

9. What are the different phases in the Law of Variable Proportions in terms of
Total Product? Give reasons behind each phase. Use diagram.
OR State the different phases in the behaviour of total product in the law of
variable proportions. Also, show the same in a diagram. OR Explain the law of
variable proportions with the help of total product curve. Use diagram.

Ans. : According to the Law of Variable Proportions when only one input is increased while
others are held unchanged, TP changes in the following manner:

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 Phase I: TP increases at increasing rates. When the variable factor is increased, efficient
utilisation of the fixed factor takes place due to specialisation. This raises efficiency of the
variable factor.
Phase II: TP increases at a diminishing rate and reaches the maximum point. Beyond a
point, increasing the variable factor puts immense pressure on fixed factor, leading to
decline in efficiency.
Phase III: TP falls. There is so much pressure of variable factor on the fixed factor that the
total product starts declining. In the given diagram, the first phase is up to A, i.e., as long as
TP curve is convex. The second phase starts after A and ends at B, that is, so long as the
curve is concave. Third phase starts after B then TP curve starts falling.

10. Draw a single diagram of the Average Revenue and Marginal Revenue curves
of a firm which can sell any quantity of the good at a given price. Explain.

Ans. : In a perfectly competitive market form, a uniform price prevails in the market,
which is decided by the market forces of demand and supply. Sellers can sell any number
of units at that price. Uniform price results in constant AR and MR. Therefore, in this

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 market form, price = AR = MR.

11. Why do problems related to allocation of resources in an economy arise?

Explain.

Ans. : What to produce, how to produce and for whom to produce are the problems
related to allocation of resources in an economy. These arise because resources are
scarce and have alternative uses. The economy has to decide on how much of the many
possible goods and services it will produce. It has to decide whether to use more labour or
more machines. It has also to decide about the distribution of goods among individuals.

12. Giving reasons classify the following into explicit costs and implicit costs.
a. Salaries of employees/ managers
b. Expenditure on purchase of raw materials
c. Rent paid for hiring building/ shop
d. Interest paid on borrowed money
e. Estimated rent of owner's own building
f. Estimated interest on capital/savings invested by the owner himself.
Ans. :
a. Explicit Cost: Paid to hired factor labour.
b. Explicit Cost: Paid to the sellers of raw material
c. Explicit Cost: building is hired from others.
d. Explicit Cost: Capital is borrowed from outside.
Implicit Cost: building is owner-occupied. Implicit Cost - Capital is
e. owned by the investor himself.
13. Explain the differences between variable factors and fixed factors.

Ans. :

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 S Variable factors Basis Fixed factors
N
o.

1. Variable factors refer to those factors, Meaning Fixed factors refer to those factors
which can be changed in the short which cannot be changed in the short
run. run.

2. They vary directly with the output. Relation They do not vary directly with the
with output.
output

3. Labour, raw material, etc. Example Capital, land, plant, machinery, etc.

14. Draw Average Revenue and Marginal Revenue curves in a single diagram of a
firm which can sell more units of a good only by lowering the price of that
good. Explain.

Ans. : In imperfectly competitive market forms like monopoly and monopolistic

competition, a seller can sell more only by lowering the price of the product. Because of
this, AR and MR curves are both negatively sloped and AR > MR.

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15.
An individual is both the owner and the manager of a shop taken on rent.
Identify implicit cost and explicit cost from this information. Explain.
Ans. :
Implicit cost: Estimated salary of the owner. Because the owner would have earned this
salary if he had worked with a firm not owned by him.
Explicit cost: Rent paid. Because it is actual money expenditure on input.

16. State the meaning and properties of production possibilities frontier.

Ans. : PPF is the locus of different combinations of the two goods that can be produced
with fixed resources, assuming full and efficient utilisation of these resources.
Properties:
i. Slopes downward from left to right.
ii. Concave to the origin.

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17. State whether the following statements are true or false. Give reasons for
your answer.
a. AVC can fall even when MC is rising.
b. The difference between TC and TVC falls with increase in output.
c. As soon as MC starts rising, AVC also starts rising.
Ans. :
a. True, so long as MC curve (Whether rising/ falling) lies below AVC curve,
the AVC curve slopes downwards.
b. False, as the difference between TC and TVC lies in TFC, which is
constant though out, even when the output increases.
c. False, so long as MC curve lies below AVC curve irrespective of the fact
that MC is rising or falling, AVC continues to fall.
18. What is the behaviour of Average Fixed Cost as output is increased? Why is it
so?
Ans. : AFC falls, when output is increased. Since, the Total Fixed Cost remains the same
with changes in output, therefore, AFC falls steadily with increase in output. AFC curve is
downward sloping.

19. Do you agree with the view that TP increases even when MP is decreasing?

Ans. : Yes, TP increases even when MP is decreasing, because MP is an addition to TP.

When MP is decreasing, only an addition to TP is decreasing i.e TP continues to increase,
though at a diminishing rate. TP starts declining only when MP becomes negative.

20. What is firm's demand curve?

Ans. : Firm's demand curve is a curve showing relationship between price of the product
and its quantity demanded in the market. We know that price = AR. AR curve shows the
relationship between price and output. So, we can say that firm's demand curve is the
same as AR curve of the firm. It is also called firm's price line. Thus, it has been proved
that AR = Price.

* Given Section consists of questions of 4 marks each. [80]

21. Giving reasons, explain the ‘Law of Variable Proportions’.

Ans. : The Law of Variable Proportions states that as only one input is increased, others
remaining unchanged, Total Product (TP) changes in three phases.
Phase: I TP rises at an increasing rate.
Phase: II TP rises at decreasing rate.
Phase: III TP falls.
Reason:

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 Phase: I TP rises at an increasing rate because in the beginning as the quantity of the
variable input is increased efficient utilisation of fixed input takes places due to
specialisation. This raises efficiency of the variable input.
Phase: II TP now rises at a decreasing rate because as the variable input is increased,
there is pressure on fixed inputs leading to decline in efficiency.
Phase: III TP starts falling because the quantity of the variable input becomes too much in
relation to the fixed input.

22. What type of production function is this in which only one input is increased
and others kept constant? State the behaviour of total product in this
production function.
Ans. : Short run production function.
Initially, TP increases at increasing rate.
After a certain level of output, TP increases at decreasing rate.
Ultimately TP falls.
23. Complete the following cost schedule:
Quantity (in Units): 0 1 2 3 4
Total cost (in ₹): 200 ... ... ... 490
Total variable cost (in ₹): 0 ... 180 ... ...
Average variable cost (in ₹): - 100 ... 80 ...

Ans. :
Total quantity TC TVC AVC
(in units) (in ₹) (in ₹) (in ₹)
0 200 0 -

1 300 100 100

2 380 180 90
3 440 240 80

4 490 290 72.5

24. Give the behaviour of marginal product and total product as more and more
units of only one input are employed while keeping other inputs as constant.
Ans. :
As more and more units of variable factor are employed, total product
increases at an increasing rate initially and marginal product increases.
After sometime use of more units of variable factor results in increase in
total product at diminishing rate and marginal product fall, but is
positive.
Ultimately total product falls and marginal product becomes negative.

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25. From the following information about a firm, calculate Average Product and
Marginal Product.
Labour 10 20 30 40 50
Total Product 100 220 360 460 500

Ans. :

Units of Labout Total Product Average Product Marginal Product (TPn -

(L) (TP) (
TP
) TPn - 1)
L

10 100 10 __
20 220 11 120
30 360 12 140

40 460 11.5 100

50 500 10 40

26. State the different phases in the behaviour of total product in the law of
variable proportions. Also, show the same in a diagram.
Ans. :

The three phases of the law of Variable Proportions are:

Phase I: TP increases at increasing rate i.e. up to K on the TP curve
Phase II: TP increases at decreasing rate i.e. from K up to L on the TP curve.
Phase III: TP falls i.e. after L on the TP curve.

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27. Define marginal product. State the behaviour of marginal product when only
one input is increased and other inputs are held constant.
Ans. : MP refers to increase in TP as one more unit of a variable input is increased.
Behaviour: As only variable input is increased.

Initially MP increases.
After a point MP decreases and remains positive.
Ultimately MP becomes negative.
28. Suppose that TFC is ₹ 120, find out (i) TC and TVC (ü) MC from the following
data:
Output (units) 1 2 3 4 5
ATC (₹) 240 160 140 160 180

Ans. :
Output (units) ATC (₹) TFC (₹) TVC (₹) TC (₹) MC (₹)
1 240 120 120 240 120

2 160 120 200 320 80

3 140 120 300 420 100

4 160 120 520 640 220

5 180 120 780 900 260

Formule used:TC = ATC × No. of unitsTVC = TC - TFCMCn - TVCn - TVCn - 1

29. Define production function. Distinguish between short run and long run
production functions.
Ans. : Production function: Refers to mathematical relation between physical input and
physical output.
Short run: Production function refers to a situation when output is increased: by changing
only one input while keeping other inputs unchanged.
Long run: Production function refers to a situation when output is increased by increasing
all the inputs simultaneously and in the same proportion.

30. Find out the total variable cost in:

Total Output Total Cost (Rs)
(Units)
0 120
1 180
2 200
3 210
4 230

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 5 270
6 360

Ans. : Total cost is the sum total of fixed cost and total variable cost. Given that the total
fixed cost is ₹ 120.
Total variable costs at different levels of output will be:

Total Output (Units) 0 1 2 3 4 5 6

Total Cost (Rs) 120 180 200 210 230 270 360
TFC 120 120 120 120 120 120 120

TVC=TC-TFC 0 60 80 90 110 150 240

31. Producer can sell more of a good only by lowering price. Prepare Total
Revenue and Marginal Revenue schedule. Take four output levels.
Ans. :
Output (Q) Price (P) Total Revenue (TR) (₹) Marginal Revenue (MR) (₹)
(units) (₹) (P × Q) (TRn - TRn - 1)

1 10 10 10

2 8 16 6
3 7 21 5

4 6 24 3

32. Define variable cost. Explain the behaviour of total variable cost as output
increases.
Ans. : The cost which changes with change in output is VC.
Behaviour of TVC: 2 phases.
1. Initially, as output is increased, TVC rises at a decreasing rate.
2. After a level of output, TVC increases at an increasing rate.
33. What does the law of variable proportions show? State the behaviour of
marginal product according to this law.
OR State the different phases of law of returns to a factor in terms of
behaviour of marginal product. Represent the same in the diagram. OR State
the likely behaviour of marginal product under the law of variable
proportions. OR Explain the law of variable proportions in terms of marginal
product with the help of a diagram. OR Prepare a marginal product schedule
when for increasing production only one input is increased. Indicate the
phases of law of variable proportions.
Ans. : The law of variable proportions states that “If we go on using more and more units
of a variable factor (labour), keeping other inputs fixed, the total product increases at an

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increasing rate in the beginning, then increases at a diminishing rate and after a level of
output, it ultimately falls.” In accordance with law, the marginal product increases in the
beginning, then it starts falling but remains positive and ultimately it continues to fall and
becomes negative.
The following schedule and diagram illustrate the law:

Units of Units of MP Phases

Land Labour L

1 Plot 1 2 Phase I.
1 Plot 2 4 MP rises (Increasing returns to a factor)

1 Plot 3 6

1 Plot 4 4 Phase II.

1 Plot 5 2 MP falls but remains positive (Diminishing returns to a
factor)
1 Plot 6 0

1 Plot 0

1 Plot 7 -2 Phase III.

1 Plot 8 -4 MP becomes negative (Negative returns to a factor)

The schedule and diagram show that there are three phases of law of variable proportion.
In Phase I, MP rises till point M, in Phase II, MP falls but remain positive till point L1 . In phase

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 III, MP becomes negative, i.e., after point L1 .

34. From the following data regarding cost of a firm, calculate:

i. Average fixed and
ii. Average variable cost:
Output 0 1 2 3 4 5 6
Total Cost (₹) 60 78 90 102 112 120 126

Ans. : The total fixed cost will be the same at all the levels of output ranging from zero to
Six. For zero output, total cost is 60. At zero output, total variable cost will be zero. Hence,
₹ 60 represents the total fixed cost at all levels of output.

Output TC (Given) TFC TVC = TC -TFC AFC AVC

TFC TVC
= =
Output Output

0 60 60 0 - -

1 78 60 18 60 18

2 90 60 30 30 15
3 102 60 42 20 14

4 112 60 52 15 13

5 120 60 60 12 12
6 126 60 66 10 11
35. From the following information about a firm, find the firm's equilibrium output
in terms of Marginal Cost and Marginal Revenue. Give reasons. Also find profit
at this output.
Output (units) Total Revenue (₹) Total Cost (₹)
1 6 7
2 12 13
3 18 17
4 24 23
5 30 31

Ans. :
Output Total Revenue Total Cost Marginal Margina Cost Profit (₹)
(units) (TR) (₹) (TC) (₹) Revenue (MR) (₹) (MC) (₹) (TR - TC)

1 6 7 6 7 -1
2 12 13 6 6 -1

3 18 17 6 4 1

4 24 23 6 6 1
5 30 31 6 8 -1

MRn , = TRn - 1 - TRn , MCn = TCn - 1 - TCn , According to the MR and MC approach, the firm

attains its equilibrium, where the following two necessary and sufficient conditions are
fulfilled:
i. MR = MC
ii. MC must be rising after the equilibrium level of output. Thus, by looking
at the above table, we can say that the firm is in equilibrium at output
equal to 4 units, because at 4th unit of output, MR = MC and MC
increases after the 4th unit of output. Profit at 4th unit of output is 1.
36. The following table gives the average product schedule of labour. Find the
total product and marginal product schedules. It is given that the total
product is zero at zero level of labour employment.
L APL
1 2
2 3
3 4
4 4.25
5 4
6 3.5
 Ans. :
L APL TPL = AP × L MPL = TPL − TPn−1

1 2 2×1=2 2

2 3 3×2=6 6-2=4

3 4 4 × 3 = 12 12 - 6 = 6
4 4.25 4.25 × 4 = 17 17 - 12 = 5

5 4 4 × 5 = 20 20 - 17 = 3

6 3.5 3.5 × 6 = 21 21 - 12 = 1

37. Calculate TVC and MC at each given level of output from the following table:
Output (Units) 0 1 2 3 4
Total Cost (₹) 40 60 78 97 124

Ans. : The total fixed cost will be the same at all the levels of output ranging from zero to
Four. For zero output, total cost is ₹ 40. At zero output, total variable cost will be zero.
Hence, ₹ 40 represents total fixed cost at all levels of output.

Output (Units) TC (Given) TFC TVC = TC - TFC MC

ΔTVC
=
ΔOutput

0 40 40 0 -

1 60 40 20 20

2 78 40 38 18
3 97 40 57 19

4 124 40 84 27

38. Find out average fixed cost in:

Total Output Total Cost (Rs)
(Units)
0 120
1 180
2 200
3 210
4 230
5 270
6 360

Ans. : Average fixed cost can be obtained by dividing TFC by units of output as follows:
Total Output (Units) 0 1 2 3 4 5 6

TFC 120 120 120 120 120 120 120

 - 120 60 40 30 24 20
TFC
AFC
Q

39. What is the relationship between total variable cost and marginal cost?
Explain.
Ans. : Marginal cost is the slope of the total variable cost curve. It's relationship
is as given:
i. When Marginal Cost falls, Total Variable Cost increases at a diminishing
rate.
ii. When Marginal Cost is minimum (at point P), Total Variable Cost is at its
inflexion point (at point P1).
iii. When Marginal Cost rises, Total Variable Cost increases at an increasing
rate.
40. Complete the following table:
Output(units Total Variable Average Variable Marginal Cost
) Cost Cost
 1 10 - -
- - 8 6
3 27 - -
- - 10 13

Ans. :
Output (units) TVC AVC Mc
1 10 10[
TVC
] 10[
ΔTVC
]
Q ΔQ

2[
TVC
] 16 [10 + 6] 8 6
AVC

3 27 9[
TVC
] 11[
ΔTVC
]
Q ΔQ

4[
TVC
] 40 [27 + 13] 10 13
AVC

* Given Section consists of questions of 6 marks each. [120]

41. Explain the Law of variable Proportion with the help of total product and
marginal product curves.
 Ans. :

According to the Law of Variable Proportions, when only one input is increased while
others are held unchanged, MP and TP change in the following manner:
Phase-I: MP increases and TP increases at increasing rate i.e. up to A on TP curve (upto K
on MP curve) because there is under utilization of the fixed input.
Phase-II: MP decreases but is positive and TP increases at decreasing rate i.e. up to B on TP
curve (upto L on MP curve) because there is pressure on fixed input.
Phase III: MP decrease and is negative and TP falls i.e. after B on TP curve (after L on MP
curve) because there is too much of variable input in relation to fixed input.

42. Complete the following table:

Output Total cost Average variable Marginal Average fixed
units Rs. cost Rs. cost Rs. costRs.
0 30
1 --- --- 20 ---
 2 68 --- --- ---
3 84 18 --- ---
4 --- --- 18 ---
5 125 19 --- 6

Ans. :
Output Total cost Average variable cost Marginal cost Average fixed
units Rs. Rs. Rs. costRs.

0 30

1 50 20 20 30

2 68 19 18 15

3 84 18 16 10

4 102 18 18 7.5
5 125 19 23 6

43. Explain the law of variable proportions with the help of total product curve.
Use diagram.

Ans. : Law of variable proportion: Law of variable proportion states that as more of the
variable factor input is combined with the fixed factor input, a point will eventually be
reached where the marginal product of the variable factor input starts declining.
Stage I: As more units of factor input are used, MP tends to rise till 3 units of factor input
are used. Here, the total product increases at an increasing rate which is called increasing
returns to the factor input.

Stage II: However, when the 4th unit of factor input is used, the diminishing returns sets in
where MP starts decreasing and TP increases at a decreasing rate. Diminishing MP reduces
to zero. The total output is the maximum when the marginal output is zero.
 Stage III: When MP is negative, TP starts declining from 34 to 10 when the 9th unit is
employed.

44. Complete the following table:

Output Marginal Average Variable Total Average Fixed
Units Cost ₹ Cost ₹ Cost ₹ Cost ₹
1 60 .......... 120 ..........
2 .......... .......... 174 ..........
3 .......... 54 .......... ..........
4 54 .......... .......... 15
5 .......... 57 345 ..........

Ans. :
Output Marginal Average Variable Total Average Fixed
Units Cost ₹ Cost ₹ Cost ₹ Cost ₹

1 60 60 120 60
 2 54 57 174 30

3 48 54 222 20

4 54 54 276 15

5 69 57 345 12

45. Given below is a cost and revenue schedule of a producer. At what level of
output is the producer in equilibrium? Give reasons for your answer:
Output (units) Price (₹) Total Cost (₹)
1 10 13
2 10 22
3 10 30
4 10 38
5 10 47
6 10 57
7 10 71

Ans. :
Output Price Total Total Marginal Revenue Marginal Revenue Profit
(Q) (P) Cost Revenue (MR) (₹) (TRn - (MC) (₹) (TCn - (₹) (TR -
(units) (₹) (TC) (₹) (TR) (₹) (P × TRn - 1) TCn - 1) TC)
Q)

1 10 13 10 10 13 -3

2 10 22 20 10 9 -2

3 10 30 30 10 8 0

4 10 38 40 10 8 2

5 10 47 50 10 9 3
7 10 71 70 10 14 -1

Producer is in equilibrium at 6th unit of output.

Reason: At output level of 5th and 6th units, the difference between Total Revenue and
Total Cost (i.e. profit) is maximum which is equal to 3 in both the cases. But, producer is in
equilibrium at 6th unit only where MR = MC, i.e. ₹ 10 as MC > MR afterwards.

46. From the following table, find out the level of output at which the producer is
in equilibrium. Give reasons for your answer.
Output (units) Price (₹) Total Cost (₹)
1 12 14
2 12 26
3 12 35
 4 12 52
5 12 64
6 12 70

Ans. :
Output (Q) Average Revenue Total Cost Total Revenue (TR) (₹) Profit (₹) (TR
(units) (AR) (₹) (TC) (₹) (AR × Q) - TC)

1 12 14 12 -2

2 12 26 24 -2
3 12 35 36 1

4 12 52 48 -4

5 12 64 60 -4

Producer is in equilibrium at 6th unit of output.Reason: Maximum profit, i.e. ₹ 2 (TR - TC).

47. Explain the law of variable proportions through the behaviour of total and
marginal product. Give reasons.
OR Explain the law of variable proportions (or law of returns to a factor) with
the help of total and marginal product curves. Use diagram. OR Explain the
likely behaviour of TP and MP when for increasing production only one input is
increased while all other inputs are kept constant. OR State the different
phases of changes in Total Product and Marginal Product in the Law of
Variable Proportions. Also show the same in a single diagram.
Ans. : The law of variable proportions states that if we go on applying more and more
units of a variable factor (labour) to a fixed factor (land), the total product increases at an
increasing rate in the beginning, then increases at a diminishing rate and after a level of
output it ultimately falls. In accordance with law, the marginal product increases in the
beginning, then it starts falling but remains positive and ultimately it continues to fall and
also becomes negative.
The given diagram illustrates the law. It shows that there are three phases of the law of
variable proportions.
In the phase I, TP increases at an increasing rate and MP rises. In phase II, TP increases at a
decreasing rate and MP falls but remains positive. In phase III, TP starts falling and MP
becomes negative. Phase I is up to point M and phase II is from point M to point T. Phase III
is after T.
Phase I : (Increasing returns to a factor): In this phase Total Product increases at
increasing rate.
Reasons: In phase I, we get increasing returns to a variable factor because greater use of
the variable factor makes it possible to utilise the fixed factor fully and also to introduce a
greater division of labour.
Phase II: (Diminishing returns to a factor): In this phase total product increases at
diminishing rate. This phase ends at the point when TP reaches its highest point.
Reasons: In phase II, we get diminishing returns to the variable factor because in this
stage the proportion between the variable factor and the fixed factor has crossed the
optimum proportion between them.
Phase III: (Negative returns to a factor): In this phase, Total Product starts declining, i.e.,
starts sloping downward.
Reasons: In phase III, the variable factor becomes too much, which yields negative
marginal product.
48. Explain the relationship between AC and MC with the help of a diagram.

Ans. :
i. As long as MC is below AC, AC curve falls till their intersection at point E.
ii. When MC curve comes to fall, it falls more rapidly than AC curve and
reaches its minimum point B earlier than the AC curve reaches its
minimum point E. Therefore, MC curve is rising from B to E whereas AC
curve is still falling from A to E.
iii. When MC curve is rising, it cuts the AC curve at its minimum point E and
after that point MC is above than AC.
49. State the phases of the law of variable proportions in terms of total
physical product. Use diagram.
 Ans. :

Statement of three phases of law of variable proportion in terms of total physical

product using the diagram.

50. Explain the conditions of a producer's equilibrium in terms of Marginal Cost

and Marginal Revenue. Use diagram:
Ans. : According to this approach, the producer is in equilibrium when the Marginal
Revenue (MR) is equal to the Marginal Cost (MC) and Marginal Cost curve cuts the Marginal
Revenue curve from below.
Two conditions under this approach are:
i. MC = MRE
ii. MC curve should cut the MR curve from below.
MR is the addition to Total Revenue from the sale of one more unit of output and MC
is the addition to Total Cost for increasing the production by one unit. The basic aim
of every producer is to maximise the profit. For this, a firm compares its MR with its
MC.
As long as the addition to revenue is greater than the addition to cost, it is profitable
for a firm to continue producing more units of output.
 In the above diagram, output is shown on the X-axis, revenue and cost on the Y-axis.
The Marginal Cost curve is 'U' shaped and P = MR = AR.
MC = MR at two points, R and K in the diagram but profits are maximised at point K,
corresponding to OQ level of output. Between OQ, and OQ levels of output, MR
exceeds MC. Therefore, firm will not stop at point Rbut will continue to take
advantage of additional profit. Thus, equilibrium will be at point K where both the
conditions are satisfied.
Two other situations may also exist:
i. MR > MC At output level less than OQ, MR > MC which implies that firm
is earning profit on the last unit of output. The marginal profit provides
an incentive to the firm to increase production and move towards OQ
units of output. Therefore, when MR > MC, the firm increases output to
maximise its profit.
ii. MR < MC At output level more than OQ, MR < MC which implies that firm
is making a loss on its last unit of output. Hence, in order to maximise
profit, a rational producer decreases output as long as MC > MR. Thus,
the firm moves towards producing OQ units of output.
51. Calculate total cost and average variable cost of a firm at each given level of
output from its cost schedule given below.
Output (units) Average fixed cost (Rs.) Marginal cost (Rs.)
 1 60 32
2 30 30
3 20 28
4 15 30
5 12 35
6 10 43

Ans. :
Output(Units) AFC(Rs.) TFC(Rs.) MC(Rs.) TVC(Rs.) AVC(Rs.) TC(Rs.)

1 60 60 32 32 32 92

2 30 60 30 62 31 122
3 20 60 28 90 30 150

4 15 60 30 120 30 180

5 12 60 35 155 31 215

6 10 60 43 198 33 258

52. Complete the following table:

Marginal Average
Output Average Variable Average Fixed
Cost (MC) Cost (AC)
(units) Cost (AVC) (₹) Cost (AFC) (₹)
(₹) (₹)
1 __ __ __ 140
2 __ 45 __ __
3 45 __ 30 __
4 __ 48 22.5 __
5 __ 52 18 __

Ans. :

Output MC (₹) (TVCn - AVC (₹) AFC (₹) AC (₹) (AFC TVC (₹) TVC (₹)
(units) TVCn - 1) (
TVC
) (
TFC
) + AVC) (AVC × Q) AFC × Q
Q Q

1 50 50 90 140 50 90

2 40 45 45 90 90 90

3 45 45 30 75 135 90
4 57 48 22.5 70.5 192 90

5 68 52 18 70 260 90

53.
State whether the following statements are true or false. Give reasons for
your answer:
 i. When marginal revenue is constant and not equal to zero, then total
revenue will also be constant.
ii. As soon as marginal cost starts rising, average variable cost also
starts rising.
iii. Total product always increases whether there is increasing returns or
diminishing returns to a factor.
Ans. :
i. False: When MR is constant and not equal to zero, it may be positive or
negative TR increases when MR is positive and decreases when it is
negative.
ii. False: AVC will rise only when MC>AVC whether MC is rising or falling.
iii. False: TP increases under Increasing Returns. It also increases under
Diminishing returns till MP is positive. TP falls under Diminishing returns
when MP is negative.
54. Suppose that a firm's TFC is * 100 and MC schedule of the firm is the
following:
Output (Units) 1 2 3 4 5 6 7
MC (₹) 10 20 30 40 50 60 70
i. Is the MC curve U-shaped?
ii. Derive AVC schedule. Will the AVC curve be U-shaped? Discuss why or
why not?
Ans. :
i. MC curve is not U-shaped.
ii.
Output (Units) 1 2 3 4 5 6 7

TFC (Given) 100 100 100 100 100 100 100

MC (given) 10 20 30 40 50 60 70

TVC = 10 30 60 100 150 210 280

∑ MC

AVC 10 15 20 256 30 35 40
TVC
=
Output

AVC curve will not be U-shaped because AVC data does not show operation of law of
variable proportion.

55. Complete the following table:

Output (Units) ATC (₹) AVC (₹) MC (₹)
1 54 30 30
 2 - 24 -
3 - - 24
4 33 - -

Ans. :
Output ATC AVC MC AFC TFC TVC

1 54 30 30 24 [ATC - AVC] 24 30

2 36 [AVC + AFC] 24 18[

ΔTVC
] 12[
TFC
] 24 48 [AVC × Q]
ΔQ Q

3 32 [AVC + AFC] 24[

TVC
] 24 8[
TFC
] 24 72 [48 + 24]
Q Q

4 33 27 [ATC - AFC 36[

ΔTVC
] 6[
TFC
] 24 108 [AVC × Q]
ΔQ Q

56. What are the total fixed cost, total variable cost and total cost of a firm? How
are they related?
Ans. : Total Fixed Cost: This refers to the costs incurred by a firm in order to acquire the
fixed factors for production like cost of machinery, buildings, depreciation, etc. In short
run, fixed factors cannot vary and accordingly the fixed cost remains the same through all
output levels. These are also called overhead costs.
Total Variable Cost: This refers to the costs incurred by a firm on variable inputs for
production. As we increase quantities of variable inputs, accordingly the variable cost also
goes up. It is also called 'Prime cost' or 'Direct cost' and includes expenses like - wages of
labour, fuel expenses, etc.
Total Cost (TC): The sum of total fixed cost and total variable cost is called the total cost.
Total cost = Total fixed cost + Total variable cost
 TC = TFC + TVC

Relationship between TC, TFC, and TVC:

1. TFC curve remains constant throughout all the levels of output as fixed
factor is constant in short run.
2. TVC rises as the output is increased by employing more and more of
labour units. Till point Z, TVC rises at a decreasing rate, and so the TC
curve also follows the same pattern.
3. The difference between TC and TVC is equivalent to TFC.
4. After point Z, TVC rises at an increasing rate and therefore TC also rises
at an increasing rate.
5. Both TVC and TFC is derived from TC i.e. TC = TVC + TFC.
57. What is the relationship between marginal product and marginal cost?
Ans. :
i. Diminishing returns determines the shape of both of these curves.
 ii. When marginal product is rising, marginal cost is falling.
iii. When diminishing returns occur, marginal product begins falling and
marginal cost begins rising.

58. What are the average fixed cost, average variable cost and average cost of a
firm? How are they related?
 Ans. :
i. Average Fixed Cost: It is the per unit fixed cost of producing a
commodity. It is calculated by dividing the total fixed cost by the number
of units of commodity produced. For example, if total fixed cost of
manufacturing 100 fans is Rs 7,500, then:
Tatal Fixed Cost 7500
AFC = AFC = = Rs 75
No. of units produced 100

Beware that fixed cost (i.e., total fixed cost) remains fixed or same at different levels
of production. As a result when units of production increase, AFC falls as depicted in
Fig.
3.7. Thus AFC decreases as level of output is increased.
ii. Average Variable Cost: It is per unit variable cost of producing a
commodity. It is worked out by dividing the total variable cost by the
number of units produced. For instance if total variable cost of
manufacturing 100 fans is Rs 12,500, then:
Total Variable Cost 12,500
AVC = AVC = = Rs 125
No. of units produced 100

It should be kept in mind that in the beginning AVC decreases but after reaching the
stage of minimum cost, it starts increasing as shown in Fig. 3.7. AVC curve is a dish
shaped (U-shaped) curve.
iii. Average total cost: It is per unit cost of production of a commodity. It
is worked out by dividing the total cost (fixed cost + variable cost) by the
number of units produced. Continuing the above example if total cost of
manufacturing 100 fans is र 20,000 (fixed cost 7,500 + variable cost
12,500), then:
Total Cast 20,000
ATC = ATC = = Rs 200
No. of units produced 100

Like total cost which is the sum of total fixed cost and total variable cost, ATC is also
the sum of AFC and AVC. Symbolically:
ATC = AFC + AVC.

59. Complete the following table:

Output (Units) Total Cost (₹) Average Variable Cost (₹) MC (₹)
1 90 - 30
2 - 27 -
3 - - 27
4 180 30 -

Ans. :
Outpu TC AVC MC TVC TFC AF AC
t C
 1 90 30[
TVC
] 30 30 [MC of 1 60 [TC - 60 90[
TC
]
Q Q

unit] TVC]

2 114 [AC × 27 24[

ΔTVC
]
54 [AVC × Q] 60 30 578 [AVC +
ΔQ

Q] AFC]
3 141 [AC × 27[
TVC
]
27 81 [54 + 27] 60 20 47 [AVC + AFC]
Q

Q]

4 180 30 39[
ΔTVC
]
120 [TC - TFC] 60 15 45
ΔQ

60. Show the behaviour of AC when AVC per unit of output is constant.

Ans. : Average cost will fall when AVC per unit of output remains constant. It is so because
AC includes AFC also and AFC always fall with increase in production. It can be explain with
the help of given diagram.

In the given diagram AVC is constant from the range of output OQ to OQ,. As we know, AC
is sum of AVC and AFC. It can be seen from the above diagram that when AVC is constant
AFC is falling which makes the Average Cost to fall.
So, when AVC remains constant, AC falls.

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