Microeconomics

Grade- 11
Production and Cost

1. Explain the concept of a production function.

Ans. Production function expresses the maximum quantity of a commodity that can be
produced per unit of time, with given amount of inputs when the best production
technique is used. It is expressed in terms of equation:
Qx = f(L, K)
where Qx = Production of commodity
L = Labour
K = Capital
(It is assured that labour and capital are the only two factors used for production)
2. What is the total product of an input?

Ans. Total product refers to the total amount of a commodity produced during some
period of time along with different factors of production.
3. What is the average product of an input?

Ans. Average product refers to the production unit of variable factor.

Therefore Average product=Total ProductOutputTherefore Average product=OutputTotal
Product
4. What is the marginal product of an input?

Ans. Marginal product is the change in total production resulting from change in the unit
of a variable factor.
5. Explain the relationship between the marginal products and the total
product of an input.

Ans. The relationship between TP and MP are:

(i) When TP increases at an increasing rate, MP increases.
(ii) When TP increases at a diminishing rate, MP declines.
(iii) When TP reaches its maximum, MP becomes zero.
(iv) When TP begins to decline, MP becomes negative.
6. Explain the concepts of the short run and the long run.

Ans. Short-run production function refers to a situation where a firm makes changes in
the only output by changing its variable factors and all the other inputs are fixed. Time
period in which firm make these change in said to be short run.
Long-run production function refers the change in output when all inputs used in the
production of good are changed simultaneously and in the same proportion. In this case
scale of production is changed.
7. What is the law of diminishing marginal product?

Ans. Law of diminishing marginal product states that as more and more unit of a
variable factor are applied to the given quantity of a fixed factor, total product increase
at a diminishing rate and marginal product falls.
8. What is the law of variable proportions?
Ans. Samuelson defines this law as follows: “An increase in some inputs relative to other
fixed inputs will in a given state of technology, cause output to increase at an increasing
rate but after a point, the extra output resulting from the same additions of extra input
will become less and less.
9. When does a production function satisfy constant returns to scale?

Ans. There is a situation of constant returns to a scale when a proportional increase in

all the factors of production leads to an equal proportional increase in the output.
10. When does a production function satisfy increasing returns to scale?

Ans. Increasing returns to scale holds when a proportional increase in all the factors of
production leads to an increase in the output by more than the proportion.
11. When does a production function satisfy decreasing returns to scale?

Ans. When an additional unit of variable factor gives lesser and lesser amount of output,
it satisfies decreasing returns to scale.
12. Briefly explain the concept of the cost function.

Ans. The cost function is the functional relationship between the cost of production and
the output. It studies the behaviour of cost at different levels of output when technology
is assumed to be constant. It can be expressed as: C = f(Q) where, C = cost, f =
functional relativity and Q = units of output.
13. What are the total fixed cost, total variable cost and total cost of a firm?
How are they related?

Ans. Total Fixed Cost is incurred by a firm in order to acquire the fixed factors of
production and it does not change with the change in output.
Total Variable Cost is incurred by a firm on variable inputs of the firm used for
production and it does change with the change in output.
For instance, wages of labour, fuel expenses, etc.
Total Cost is the sum total of total variable cost and total fixed cost.
Thus,
TC = TFC + TVC.
14. What are the average fixed cost, average variable cost and average cost of
a firm? How are they related?

Ans. Average Fixed Costs (AFC): Average fixed cost refers to the per unit fixed cost of
production. It is calculated by dividing TFC by total output i.e.,
AFC =TFC/Q
where,
AFC = Average Fixed Cost
TFC = Total Fixed Cost
Q = Quantity of output.
Average Variable Cost (AVC): Average variable cost refers to the per unit variable cost of
production.
It is calculated by dividing TVC by the total output.
AVC =TVC/Q
where
AVC = Average Variable Cost
TVC = Total Variable Cost
Q = Quantity of output
Average Total Cost (ATC) Or Average Cost (AC): Average cost refers to the per unit
total cost of production. It is calculated by dividing TC by the total output.
AC =TC/Q
where
AC = Average Cost
TC = Total Cost
Q = Quantity of output
The average cost is also defined as the sum of the average fixed cost and average
variable cost.
AC = AFC + AVC
Like AVC, average cost also initially falls with an increase in output. Once the output
rises to the optimum level, AC starts rising.
15. Can there be some fixed cost in the long run? If not, why?

Ans. No, there can’t be any fixed cost in the long run since all costs are variable costs in
the long run and no factor is a fixed factor in the long run as fixed costs exists only in
the short-run.
16. What does the average fixed cost curve look like? Why does it look so?

Ans. The Average Fixed Cost (AFC) curve is a rectangular hyperbola in shape. The area
under the curve is constant because TFC is constant at all levels of output. AFC
decreased as the output increases. So, AFC curve is downward sloping to the right.
17. What do the short run marginal cost, average variable cost and short run
average cost curves look like?
Ans. The curves of short-run marginal cost, Average variable cost and Average cost are
of U-shaped.
18. Why does the SMC curve cut the AVC curve at the minimum point of the
AVC curve?
Ans. It is because when AVC falls, SMC is less than AVC. When AVC starts rising, SMC is
more than AVC. Hence, it happens only when AVC is constant and at its minimum point
that SMC is equal to AVC. Therefore, the SMC curve cuts the AVC curve when it is
minimum.
19. At which point does the SMC curve cut the SAC curve? Give reason in
support of your answer

Ans. SMC curve intersects SAC curve at its minimum point. This is because as long as
SAC is falling, SMC remains below SAC and when SAC starts rising, SMC remains above
SAC. Hence, SMC intersects SAC at its minimum point P, where SMC = SAC.
20. Why is the short run marginal cost curve ‘U’-shaped?

Ans. The marginal cost curve is U-shaped in the short run because of the “law of
variable proportions”. According to this law, MC curve initially slopes downward till it
reaches its minimum point and thereafter, it starts rising. Therefore, it leads to a U-
shape of the curve when presented graphically.
21. What do the long run marginal cost and the average cost curves look like?

Ans. Both MC and AC curves, in the long run, are U-shaped cost curves. This U-shape is
a little less flat than the U-shape of the short-run MC and AC curves i.e., long-run MC and
AC curves are a little flatter in shape. This behaviour is in accordance with the returns to
scale.
22. Let the production function of a firm be
Q = 5L1/2K1/2
Find out the maximum possible output that the firm can produce with 100
units of L and 100 units of K.

Ans. Given: Q = 5, K = 100 units, L = 100 units

Qx = F (X1.X2)
Q = 5(100)1/2 (100)1/2
Q = 5(102)1/2(102)1/2
Q = 5 × 10 × 10
Q = 500 units
The maximum output, the firm can produce with 100 units of L and 100 units of K is 500
units.
23. Let the production function of a firm be
Q = 2L2K2
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. Given, Q = 2L2K2

L = 5, K = 2
Qx = f (X1.X2)
Q = 2(5) 2. (2)2
Q = 2 × 25 × 4
Q = 200 units
Maximum possible output with 0 unit of L and 10 units of K is 0 units.
24. Find out the maximum possible output for a firm with zero unit of L and 10
units of K when its production function is Q = 5L + 2K.

Ans. Given, Q = 5L + 2K
L = 0, K = 10
Q = 5 × 0 + 2 × 10
Q = 0 + 20
Q = 20 units
The maximum output = 20 units.