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NCERT Solutions for Class 12th

Microeconomics : Chapter3 Production and


Costs
By Neepur Garg - March 13, 2015

NCERT Solutions for Class 12th MicroeconomicsChapter3


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.

CLICK HERE for Class 12 Economics Notes.

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

Question 1. Explain the concept of a production function.

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)

Question 2. What is the total product of an input?


Answer Total product means the total quantity of goods produced by a firm during a given
period of time with given inputs.

TP = AP x Number of variable factor (L)

Question 3. What is the average product of an input?

Answer Average product is defined as the output produced per unit of variable input.
Calculated as AP=TP/L

Question 4. What is the marginal product of an input?

Answer Marginal product refers to the additional output produced, when one more unit of
variable factor is employed. Calculated as

MP= Change in output / change in input =q / X1

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

Answer

Units of fixed factor Units of variable factor MD TP AP

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

Question 7. What is the law of diminishing marginal product?

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.

Units of fixed factor Units of variable factor MD

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

Question 8. What is law of variable proportions?

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.

Question 9. When does a production function satisfy constant returns to scale?

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

Question 12. Briefly explain the concept of the cost function.

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

Output TFC TVC TC= TFC+ TVC

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

Where TFC = Total fixed cost , Q= Quantity of output

(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

Where, TC = Total Cost , Q = Quantity of output

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

Labour (L) TP (units) AP = TP/L Mp = TPn TPn-1

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

APL 2 3 4 4.25 4 3.5

Answer

Labour (L) APL TP = APLx L Mp = TPn TPn-1

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

Labour (L) MPL TP AP = TP/L

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

Q TC TFC TVC= TC-TFC SAC= TC/Q SMC=TCn-TCn-1

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

6 120 10 110 20.00 30


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

TFC=U x TVC = TC- SAC = SMC = TCn AFC = AVC =


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

1 50 20 30 50.00 30 20.00 30.00


2 65 20 45 32.50 15 10.00 22.50

3 75 20 55 25.00 10 6.67 18.33

4 95 20 75 23.75 20 5.00 18.75

5 130 20 110 26.00 35 4.00 22.00

6 185 20 165 30.83 55 3.33 27.50

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

TC 500 300 200 300 500 800

Answer

Q TC TFC TVC= MC TC= FC+VC AVC=TVC/Q SAC=TC/Q

0 0 100 100.00 0 0.00

1 500 100 500 600.00 500 600.00

2 300 100 800 900.00 400 450.00

3 200 100 1000 1100.00 333.33 366.67

4 300 100 1300 1400.00 325 350.00

5 500 100 1800 1900.00 360 380.00

6 800 100 2600 2700.00 433.33 450.00

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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