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MICRO ECONOMICS

CHAPTER 3

PRODUCTION AND COST

I Choose the correct answer

1. The formula of production function is

a) q=f(L,K) c) Y=f(x)
b) q=d(p) d) None of the above.
Ans: (a) q=f(L,K)

2. In the short run, a firm

a) Can change all the inputs c) can keep inputs fixed
b) Cannot vary all the inputs d) None of the above
Ans: (b) Cannot vary all the inputs

3. The change in output per unit of the change in the input is

called
a) Marginal product c) Total product
b) Average Product d) Product
Ans: (a) Marginal product

4. Cobb-Douglas production function is

a) q=(x, x) c) q= (x1α, x2β)
b) q=(x1, x2) d) q=(0)
Ans: c) q= (x1α, x2β)

5. TC=
a) TVC c) TFC+TVC
b) TFC d) AC + MC
Ans: c) TFC+TVC

II Fill the blanks

1. In the long run, all inputs are ....Varied or Variable…
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Ans: Varied
2. …Average Product…..is defined as the output per unit of
variable input.
Ans: Average Product
3. Marginal product and average product curves are …Inverted U…
in shape.
Ans: Inverted U
4. SMC curves cuts the AVC curve at the …Minimum…point of
AVC curve from below.
Ans: Minimum
5. … Isoquant ….is the set of all possible combinations of the two
inputs that yield the same maximum possible level of output.
Ans: Isoquant

III Match the following

A B
1. CRS a) ΔTC/ΔC
2. SAC b) Long run Average
3. LRAC cost
4. TFC+TVC= c) Short run Average
5. SMC cost
d) Constant returns
to scale
e) TC

Ans: 1 - (d); 2 - (c); 3 - (b); 4 – (e); 5 – (a)

IV Answer the following questions in a sentence or word

1. What do you meant by total product?

Ans: It refers to the total value of a good or output
produced by a firm with the given inputs.
The total volume of goods and services produced during a
specified period of time is TP.
2.What is Average product?
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Ans: Average Product is defined as the output per unit of

variable input. We calculate it as APL=TPL/L.
3.Give the meaning of marginal product.

Ans:- It refers to the change in total output due to

employment of one additional input of variable factor.

MP is the addition to total product by the employment of an

additional unit of a variable factor.
Δ TP L Change∈output
MPL = ΔL
 or Change∈input

4.Write the meaning of cost function of the firm.

Ans: The cost function of the firm describes the least cost of
producing each level of output, given prices of factors of
production and technology.
5.What is total fixed cost?

Ans: The cost incurred by a firm in employing the fixed inputs or

fixed factors is called as total fixed cost. The fixed cost remains
the same irrespective of the size of the output. This is valid in the
short run.

6.What is average fixed cost?

Ans: AFC refers to the per unit fixed cost of producing a
commodity. We can obtain the average fixed cost by dividing the
total fixed cost by the number of units produced. AFC has the
shape of a Rectangular Hyperbola.

AFC = TFC/q.

V Answer the following questions in four sentences.

1. What is Isoquant?
Ans: An Isoquant is a set of all possible combinations of two
inputs which produce equal or same level of output. Each
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isoquant represents a particular level of output. They slope

downwards or have a negative slope.
2. Give the meaning of the concepts of short run and long run
Ans: The concepts of short run and long run are defined based
on whether all the inputs can be varied or not. It is not defined
in terms of days, months or years.
In the short run, at least one of the factor cannot be varied
and therefore, remains fixed. The factor that remains fixed is
called the fixed factor and the other factors which the firm can
vary is called the variable factors.
In the long run, all factors of production can be varied. A
firm in order to produce different levels of output in the long run
may vary the inputs. So, in the long there is no fixed factor.
3. Mention the types of returns to scale.
Ans: The types of returns to scale are
(a) Constant Returns to Scale
c) Increasing Returns to Scale
d) Decreasing Returns to Scale
4. Name the short run costs.
Ans: The short run costs are: Total Fixed cost, Total Variable
cost, Total Cost, Average Fixed Cost, Average Variable Cost,
Short Run Average Cost and Short Run Marginal Cost.
5.What are long run costs?
Ans: Costs which are valid in the long run are called long run
costs. There are two long run costs namely, (a) Long run Average
Cost (b) Long run Marginal Cost.

VI Answer the following questions in 12 sentences.

1. Explain isoquant with the help of a diagram.

Ans: An Isoquant is a set of all possible combinations of two

inputs which produce equal or same level of output. Each
isoquant represents a particular level of output. They slope
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downwards or have a negative slope.

• The diagram above generalizes the concept of an isoquant. In the

diagram, labour is measured on the X - axis and capital is
measured on the Y - axis. There are 3 isoquants for the three
output levels, viz. q = q1, q = q2 and q = q3.

• Two input combinations (L1, K2) and (L2, K1) give us the same
level of output q1.

• If we fix capital at K1 and increase labour to L3, output

increases and we reach a higher isoquant q = q2.

• with greater amount of one input, and less of another input the
same level of output can be produced. Therefore, isoquant
curves slope downwards from left to right or they have a negative
slope.

2.Explain TP, MP and AP with the example.

Ans: Total Product or Total Physical Product (TP or TPP) :-

• It refers to the total value of a good or output produced by
a firm with the given inputs.
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• The total volume of goods and services produced during a

specified period of time is TP.
• It is the physical output corresponding to each set of
inputs.
• TP can also be termed as the sum total of
marginal products.
TP = ΣMP

Average product (AP):-

The Average Product refers to output per unit of the variable

factor used in the production process.

When we divide the total output or total product by the

quantities of a variable factor we get AP.

APL = TPL/L or

APL = Total Product/number of units of variable factor.

Here ‘L’ refers to Labour.

2. Marginal Product (MP) :-

• It refers to the change in total output due to employment of
one additional input of variable factor.

• MP is the addition to total product by the employment of an

additional unit of a variable factor.
Δ TP L Change∈output
MPL = ΔL
 or Change∈input

• Here, Δ represents the change in the variable input.

Thus, the Marginal Product refers to the change in the total

product when an additional unit of the variable factor is used.

Table showing TP, AP and MP

Labour TP MPL APL

0 0 - -
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1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5
3.Write a brief note on returns to scale.

The long run production function can be studied using Returns to

Scale. The returns to scale can be studied under three categories-

1. Increasing Returns to Scale (IRS)

2. Constant Returns to Scale.(CRS)
3. Decreasing Returns to Scale.(DRS)

1. Increasing returns to Scale (IRS):-

A proportionate increase in input leading
to a greater than proportionate increase in the output is
called as increasing returns to scale
2. Constant Returns to Scale (CRS):-
A proportionate increase in inputs leading to an
equiproportionate increase in the output is called as Constant
returns to Scale.

3. Decreasing Returns to Scale (DRS):-

A proportionate increase in input leading
to a less than proportionate increase in the output is called
as Decreasing returns to scale.

NOTE:-
Consider the production function q= f(x1, x2)
A firm produces ‘q’ quantity of output using x 1 amount of
factor 1 and x2 amount of factor 2.
If the firm decides to increase the employment level of both
the factors by ‘t’ times where t>1, mathematically it will
exhibit CRS.
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4.Explain the long run costs.

Ans: Long run is a period of time where all inputs or factors of

production can be varied. There are no fixed costs in the long run.
The long run costs include the LMC ( Long Run Marginal Cost) and
the LAC (Long Run Average Cost).

LAC (Long Run Average Cost) :- Total Cost/ quantity produced

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LAC = TC/q

LMC ( Long Run Marginal Cost):- Change in Total Cost / Change in

quantiy produced
Δ TC
LMC = Δq

or

LMC = TCn – TCn-1

The LAC or LRAC curve first starts to fall, then after it reaches the
minimum point starts to rise again. The LRMC or LMC cuts the LRAC
from below. The LRAC curve looks somewhat like an ‘U’ so also is the
shape of the LRMC curve.

If in the long run the LRAC is falling it is because of the IRS or

increasing returns to scale.

The point at which the LRMC cuts the LRAC curve shows the CRS or
constant returns to scale.

The rising part of LRAC curve indicates DRS or Diminishing or

Decreasing Returns to Scale.
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2. The following table gives the TP schedule of labour. Find the

corresponding Average product and marginal product
schedules.

TPL 0 1 35 50 40 48
L 0 1 2 3 4 5
Ans: Calculation of Average Product (AP) and Marginal Product
(MP). AP is obtained by dividing TPL by Labour (L) and MP is
obtained from TPL with the help of formula TPL – TPL-1

TPL L AP MP
0 0 0 -
1 1 1 1
35 2 17.5 34
50 3 16.66 15
40 4 10 -10
48 5 9.6 8

VII Answer the following questions in 20 sentences.

1. Explain the various short run costs with the help of a table.
The various short run costs are Total Cost, Total Fixed Cost,
Total Variable Cost, Average Cost, Average Fixed Cost, Average
Variable Cost, and Marginal Cost. The following table shows the
various types of short run costs:

The TFC, TVC, TC, AFC, AVC, AC and MC is shown in table as

follows:

1. TFC:- (Total Fixed Cost)

The cost incurred by a firm in employing the fixed inputs or fixed
factors is called as total fixed cost. The fixed cost remains the same
irrespective of the size of the output. This is valid in the short run.

2. TVC:- ( Total Variable Cost)

This is incurred in employing the variable factors or variable
inputs. The cost varies with the output. When output is zero, the
TVC is also zero.
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3.TC (Total Cost):-

Total cost is the summation of TFC and TVC. TC= TFC+ TVC.

4.AFC (Average Fixed Cost):-

refers to the per unit fixed cost of producing a commodity. We

can obtain the average fixed cost by dividing the total fixed cost
by the number of units produced.

5.AVERAGE VARIABLE COST (AVC):-

AVC is variable cost per unit of output produced.
AVC =TVC/q
q = number of units produced.

6.SHORT RUN MARGINAL COST ( SMC):-

Marginal Cost refers to addition made to Total Cost by producing
one additional unit of output.
Δ TC
SMC = Δ q
7.Average Cost (AC) or SAC :-
AC is cost per unit of output produced. It is got by dividing TC
by the number of units produced.
AC= TC/q

Output TFC TVC TC AFC AVC AC MC

0 100 0 100 100 0 0 -

1 100 150 250 100 150 250 150

2 100 200 300 50 100 150 50

3 100 250 350 33.33 83.3 116.6 50

4 100 300 400 25 75 100 50

5 100 420 520 20 84 104 120

6 100 530 630 16.66 88.3 105 110

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2. Explain the shapes of long run cost curves.

Ans: Long run is a period of time where all inputs or factors of

production can be varied. There are no fixed costs in the long run.
The long run costs include the LMC ( Long Run Marginal Cost) and
the LAC (Long Run Average Cost).

LAC = TC/q

LAC (Long Run Average Cost) :- Total Cost/ quantity produced

Δ TC
LMC = Δq

LMC ( Long Run Marginal Cost):- Change in Total Cost / Change in

quantiy produced

OR

LMC = TCn – TCn-1

Where

TCn = Total cost of the present or current unit

TCn-1= It is Total cost of the previous unit

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The LAC or LRAC curve first starts to fall, then after it reaches the
minimum point starts to rise again. The LRMC or LMC cuts the LRAC
from below. The LRAC curve looks somewhat like an ‘U’ so also is the
shape of the LAC curve.

If in the long run the LRAC is falling it is because of the IRS or

increasing returns to scale.

The point at which the LRMC cuts the LRAC curve shows the CRS or
constant returns to scale.

The rising part of LRAC curve indicates DRS or Diminishing or

Decreasing Returns to Scale.

In the above diagram to the right of ‘q1’ the LRAC curve is rising and
to the left of q1 LRAC is falling.

3.Explain the shapes of TP, MP and AP curves.

Ans: Total Product or Total Physical Product (TP or TPP) :-

It refers to the total value of a good or output produced by a firm

with the given inputs. TP can also be termed as the sum total of
marginal products.
TP = ΣMP
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SHAPE OF TP CURVE:-

In the above diagram the output is measured on the Y- axis and

Labour as an input is measured on the X-axis. The TP curve has a
positive slope. Initially the TP curve increases but later the increase is
slow.

2.Average product (AP):-The Average Product refers to output per

unit of the variable factor used in the production process. When we
divide the total output or total product by the quantities of a variable
factor we get AP.

APL = TPL/L or

3. Marginal Product (MP) :-

• MP is the addition to total product by the employment of an
additional unit of a variable factor.
Δ TP L Change∈output
MPL = ΔL
 or Change∈input

SHAPES OF THE AP AND MP CURVES:-

The AP and MP curves have the shape of an inverted U. Initially when

the input increases both the MP and the AP rise. As long as the MP
curve lies above the AP curve the AP is rising but once MP begins to
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fall MP curve goes below the AP curve. The MP curve cuts the AP
curve from above at point ‘P’ at the maximum point of AP.

4. A firm’s SMC schedule is shown in the following table. TFC

is Rs.100. find TVC, TC, AVC and SAC schedules of the firm

Q 0 1 2 3 4 5 6
SMC - 500 300 200 300 500 800

Ans:

Q SMC TFC TVC TC AVC SAC

0 - 100 0 100 0 0
1 500 100 500 600 500 600
2 300 100 800 900 400 450
3 200 100 1000 1100 333.33 366.66
4 300 100 1300 1400 325 350
5 500 100 1800 1900 360 380
6 800 100 2600 2700 433.33 450
Note:
TFC is given.
TC is obtained by adding SMC for each unit of output like 500
as it is taken, then 500+300=800; 800+200(SMC)=1000 and so
on.
TC is TFC+TVC,
AVC is TVC divided by Q; and
SAC is TC divided by Q.
5. Explain the law of variable proportions with the help of a
diagram.

Ans: LAW OF VARIABLE PROPORTIONS OR LAW OF DIMINISHING

MARGINAL PRODUCT:-

The law of variable proportions is also called as the Short run

production function. Here a few factors of production remain fixed
and a few are variable. Let us consider the same example to analyse
the law.
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Total Product, Marginal product and Average product

Labour TP MP AP
0 0 - -
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

In the beginning, the TP increases as Labour input increases, the

MP increases in the beginning and then begins to fall. This tendency
of the MP to first increase and then fall is called as the law of variable
proportion.

The law of variable proportions tells that the MP of a factor input

rises initially with the increase in employment of the factor inputs,
but after reaching a certain level of employment it begins to fall.
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REASONS FOR THE OPERATION OF THE LAW OF VARIABLE

PROPORTIONS:-

When one factor input is fixed and the other factor input is varied or
increased, the output increases due to the optimal utilization of the
fixed factor. If we continue to increase the employment of the variable.

factor or input the output begins to fall as the production process

gets too crowded.

Conclusion:- The law of variable proportion is an important laws in

the field of Economics, but the law is pessimistic and completely
ignores that with progress in technology the output can be increased.

VIII Assignment and project oriented questions.

1. Find the missing products of the following table.

Factor 1 TP MP1 AP1

0 0
1 10
2 24
3 40
4 -
5 -
6 57
0 0
- 10
- 12
16 13.33
10 -
6 11.2
1 9.5

Ans:

Factor 1 TP MP1 AP1

0 0 0 0
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5
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