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It is all about micro economics

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Costs

By Neepur Garg - March 13, 2015

Production and Costs

National Council of Educational Research and Training (NCERT) Book Solutions for class 12th

Subject: Economics

Chapter: Chapter 3 Production and Costs

These Class 12th NCERT Solutions for Economics provide detailed, step-by-step solutions to all

questions in an Economics NCERT textbook.

Class 12th Economics Chapter 3 Production and Costs NCERT Solution is given below.

Answer It is the technological knowledge that determines the maximum levels of output that

can be produced using different combinations of inputs. If the technology improves, the

maximum levels of output obtainable for different input combinations increase. Then we have

a new production

function. e.g., A firm produce a product (Y) by using two inputs X1 and X2.

Then production function can be expressed as

qy =: f (X1.X2)

Answer Total product means the total quantity of goods produced by a firm during a given

period of time with given inputs.

Answer Average product is defined as the output produced per unit of variable input.

Calculated as AP=TP/L

Answer Marginal product refers to the additional output produced, when one more unit of

variable factor is employed. Calculated as

Question 5. Explain the relationship between the marginal products and the total product of

an input.

Answer

1 0 0

1 1 6 6 6

1 2 14 20 10

1 3 28 48 16

1 4 24 72 18

1 5 8 80 16

1 6 4 84 14

1 7 0 84 12

8 -2 82 0

Relation between TP and MP

(i) When MP increases, TP increases at increasing rate.

(ii) When MP starts diminishIng. TP Increases only at diminishing rate.

(iii) When MP= D.TP is maximum.

(iv) When MP is negative, TP is declinillg.

Question 6. Explain the concepts of the short run and the long run.

Answer Short run refers to a period in which output can be changed by changing only

variable factors. In the short run. fixed inputs like land. building, plant machinery etc.

cannot be changed. It means, production can be raised by increasing only variable factors, but

till the extent of fixed factors.

Long run refers to a period in which output can be changed by changing. all factor of

production In the long run firm can change its factory size, techniques of production, purchase

new plant machinery, patents etc

Answer Law of diminishing marginal product means that when more and more units of a

variable factors are employed along with a fixed factor, the

marginal product of the factor must fall. e.g.

1 0

1 1 6

1 2 14

1 3 28

1 4 24

1 5 8

1 6 4

1 7 0

8 -2

Answer The law which exhibits the relationship between the units of a variable factor

(Keeping all other factors constant) and the amount of output

in the short-run known as law of variable proportion.

Answer Production function satisfy constant returns, when MP becomes zero and TP reaches

its maximum point.

Question 10. When does a production function satisfy increasing returns to scale?

Answer A production function satisfy increasing returns, when every additional variable

factor adds more and more to the total output. It means

TP Increase at an increasing order and MP also increases

Question 11. When does a production function satisfy decreasing returns to scale?

Answer A production function satisfy decreasing returns, when every additional variable

factor adds lesser and lesser amount of output. It means

TP increases at a diminishing rate and MP falls with increase in variable factor

Answer Cost Function The functional relationship between cost and quantity produced is

termed as cost function.

C =F(Qx)

C = Production Cost

Qx = Quantity produced of x goods

Cost function of a firm depends on two things.

(i) Production function,

(ii) Price of the factors of production. Higher the output of a firm. higher would be the

production cost. Thats why it depends on quantum of output.

Question 13. What are the total fixed cost, total variable cost and total cost of a firm? How

are they related?

Answer Total Fixed Cost The cost which does not change with the change In output. Even

when output is zero. In other words, fixed costs are the sum total expenditure on the

purchase or hiring of fixed factors of production.

Total Variable Cost The cost which change with the change in output.

In other words. variable costs are the expenditure incurred on the use of variable factors of

production

Total cost is the sum total of total fixed cost and total variable cost at various level of

output Relation among TFC, TVC and TC

0 15 0 15

1 15 5 20

2 15 12 27

3 15 20 35

4 15 28 43

5 15 35 50

5 15 42 57

TC = TFC = TVC

TFC is constant at all levels of output.

TVC increases as output increases.

TC is parallel to TVC.

Question 14. What are the average fixed cost, average variable cost and average cost of a

firm? How are they related?

Answer

(i) Average Fixed Cost (AFC) It refers to the per unit fixed cost of production Calculated as

AFC= TFC/Q

(ii) Average Variable Cost (AVC) It refers to the per unit variable cost of production Calculated

as AVC= TVC /Q

Where TVC = Total Variable Cost , Q= Quantity of output

(iii) Average Cost (AC) It refers to the per unit total cost of production. Calculated as AC=TC/Q

Question 15. Can there be some fixed cost in the long run? If not, why?

Answer No, there are no fixed costs in the long-run as all the factors are variable Fixed cost

exists only in the short run

Question 16. What does the average fixed cost curve look like? Why does it look so?

Answer The average fixed cost curve looks like a rectangular hyperbola. It happens because

same amount of fixed cost is divided by increasing output. As a result, AFC curve slope

downwards and is a rectangular hyperbola.

Question 17. What do the short run marginal cost, average variable cost and short run

average cost curves look like?

Answer The curves of short-run marginal cost, average variable cost and average cost are U

shaped.

Question 18. Why does the SMC curve cut the AVC curve at the minimum point of the AVC

curve?

Answer It is only when AVC is constant and at its minimum point. that SMC is equal to AVC.

Therefore, SMC curve cuts AVC curve at its minimum points. And when AVC falls, SMC is less

than AVC.

Question 19. At which point does the SMC curve cut the SAC curve? Give reason in support

of your answer.

Answer SMC curve cuts the SAC curve at its minimum Point It happens because when SAC

falls. SMC is less than SAC is less then SAC starts rising SMC IS more than SAC. It is only

when SAC is constant and at its minimum point

Question 20. Whyis the short run marqmal cost curve U-shaped?

Answer Short-run marginal cost curve is U-shaped because of the law of variable proportions.

In the short run as the employment of variable factor increases (fixed factor being constant) in

the initial stage MC decreases owing to increasing return bun finally tend to rise in accordance

with the law of variable proportion. Hence the U-shape of MC.

Question 21. What do the long run marginal cost and the average cost curves look like?

Answer Long run marginal cost and the average costs curve is U shaped but fallter than

shortrun U-shaped.

Question 22. The following table gives the total product schedule of labour. Find the

corresponding average product and marginal product schedules of labour.

L 0 1 2 3 4 5

TPL (Units) 0 15 35 50 40 48

Answer

0 0

1 15 15.00 15

2 35 17.50 20

3 50 16.67 15

4 40 10.00 -10

5 48 9.60 8

Question 23. 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 1 2 3 4 5 6

Answer

1 2.00 2 2

2 3.00 6 4

3 4.00 12 6

4 4.25 17 5

5 4.00 20 3

6 3.50 21 1

AP=TP/L , TP= AP x L

Question 24. The following table gives the marginal product schedule of labour. It is also

given that total product of labour is zero at zero level of employment. Calculate the total and

average product schedules of labour

L 1 2 3 4 5 6

MPL 3 5 7 5 3 1

Answer

1 3 3 3

2 5 8 4

3 7 15 5

4 5 20 5

5 3 23 4.60

6 1 24 4

Question 25. The following table shows the total cost schedule of a firm. What is the total

fixed cost schedule of this fum? Calculate the TVC, TFC, AVC, SAC and SMC schedules of the

firm.

Q 0 1 2 3 4 5 6

TC 10 30 45 55 70 90 120

Answer

0 10 10 0 0.00 0

1 30 10 20 30.00 20

2 45 10 35 22.50 15

3 55 10 45 18.33 10

4 70 10 60 17.50 15

5 90 10 80 18.00 20

AFC = TFC/Q AVC = TVC/Q

0.00 0.00

10.00 20.00

5.00 17.50

3.33 15.00

2.50 15.00

2.00 16.00

1.67 18.33

Here,

Q = Output in Units

TC =Total Cost

TFC = Total Factor Cost (Fixed)

TVC =Total Variable Cost

SAC = Short run Average Cost or AC

SMC = Short run Marginal Cost or MC

AFC =Average Factor Cost (Fixed)

AVC = Average Variable Cost

Question 26. The following table gives the total cost schedule of a firm. It is also given that

the average fixed cost at 4 units of output is Rs5. Find the TVC, TFC, AVC, AFC, SAC and SMC

schedules of the firm for the corresponding values of output.

Q 0 1 2 3 4 5 6

TC 50 65 75 95 70 130 185

Answer

Q TC

S TFC TC/Q TCn-1 TFC/Q TVC/Q

2 65 20 45 32.50 15 10.00 22.50

Question 27. A firms SMC schedule is shown in the following table. The total fixed cost of the

firm is Rs 100. Find the TVC,TC,AVC and SAC

schedules of the firm.

Q 0 1 2 3 4 5 6

Answer

Question 28. Let the production function of a firm be Q = 5, L1/2K1/2 . Find out the maximum

possible output that the firm can produce with 100 units of L and 100 units of K

Answer.

Given

Q=5

L= 100 units

K= 100 units

Qx = F(X1.X2) (Production function equation)

After putting values

Qx= 5.1001/2.1001/2

=5100.100

=500

Maximum output = 500 units

Question 29. Let the production function of a firm be Q = 2L2K2Find out the maximum

possible output that the firm can produce

with 5 units of Land 2 units of K. What is the maximum possible output that the firm can

produce with zero unit of Land 10 units of K?

Answer

Q = 2L2K2

L = 5 Units

K = 2 units

Qx= (X1.X2)

After putting given values

Q=2 (5)2(2)2

= 200 units

Maximum possible output with 0 unit of L and 10 units of K Again putting new values in

equation

Q = 2(0)2(10)2

= O units

Question 30. Find out the maximum possible output for a firm with zero unit of Land 10 units

of K when its production function is Q = 5L + 2K

Answer

Given

Q = 5L+ 2K

L = O units

K = 10 units

After putting values in equation

Q = 5(0)+2(10)

= 20 units

The maximum output = 20 units.

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