Your cart is empty.
Practice each question, then open the answer or worked solution.
When does a production function satisfy decreasing returns to scale?
Decreasing returns to scale is when the change in the factors of production results in a decrease in the changes in the total output. This is an indication that the changes have proved to be detrimental to productivity instead of increasing productivity
Briefly explain the concept of the cost function.
The relationship between the cost of production and the total output is known as the cost function.
What are the total fixed cost, total variable cost and total cost of a firm? How are they related?
A fixed cost is a cost that does not change in relation to the total number of goods and services produced by the company. On the other hand, a variable cost is a cost that changes in relation to the total number of goods and services produced by the company.
Total Fixed Cost: The cost incurred by a company in acquiring fixed production factors like buildings, cost of machinery and depreciation.
Total Variable Cost: Cost incurred by a company on variable production factors like wages and fuel charges.
Total Cost: The total cost of the firm is the total fixed cost and total variable cost put together. It is the actual cost incurred by the company when producing a given amount of output.
What are the average fixed cost, average variable cost and average cost of a firm? How are they related?
The average fixed cost is the fixed cost per unit of output produced.
The average variable cost is the variable cost per unit of output produced.
The average cost of a firm is the average fixed cost and average variable cost put together.
Can there be some fixed cost in the long run? If not, why?
The fixed cost cannot be set in the long run. Fixed costs can only be set for the short run. Since all factors of production and inputs can change in the long run, a fixed cost cannot be determined for the output.
What does the average fixed cost curve look like? Why does it look so?
The average fixed cost resembles a rectangular hyperbola. This is because of the constantly increasing output and the fixed cost, which remains the same at every point.
What do the short run marginal cost, average variable cost and short run average cost curves look like?
The curves of the short run marginal cost, the average variable cost and the short run average cost are all U-shaped.
Why does the SMC curve cut the AVC curve at the minimum point of the AVC curve?
It can be explained by the following points:
1. When AVC (Average Variable Cost) falls, SMC (Short Marginal Curve) is lesser than AVC.
2. When AVC rises, SMC becomes more than AVC
3. When AVC is constant and is minimum, SMC is equal to AVC.
Therefore, the SMC curve cuts the AVC curve at the minimum point.
At which point does the SMC curve intersect SAC curve? Give reasons in support of your answer.
This can be explained with the following points:
1. When SAC falls, SMC is below the SAC.
2. When SAC rises, SMC is above SAC.
Therefore, the SMC curve cuts the SAC curve at its minimum point because at that point, SMC = SAC
Why is the short run marginal cost curve ‘U’-shaped?
The Marginal Curve (MC) is U-shaped as per the Law of Variable Proportion.
This can be explained as follows:
1. Shape of the Marginal Cost Curve (MC) depends on the Total Variable Cost (TVC).
2. As TVC increases at a diminishing rate, the total product increases at an increasing rate, which creates a gap in the curve leading to the fall of MC.
3. Now, as TVC increases at an increasing rate and the total product increases at a diminishing rate, making the marginal cost increase and rise upward.
4. The increasing returns and then constant returns, along with the rise in decreasing returns, make it appear like the letter U from the English alphabet; hence, it is named so.