## Theory of Production, Costs and Revenue – CS Foundation Economics Notes

1. Production
An economic term is to describe the inputs that are used in the production of goods or services in an attempt to make an economic profit. Things that are brought by producers for production are called input and the final goods or services are called production. The demand for a factor of production is a derived demand, meaning that the firm’s demand for a factor of production is derived from its decision to supply goods in another market. Factors of production – The term factors of production relates to the key factors that go into making goods. The resources that are required for production can be divided into four major groups.

• Land
• Capital
• Labour
• Entrepreneurship

Land – It is a natural resource that can not be created. It includes the resources that are above ground (climate, rain, etc.), resources that are below the ground (mineral resources, etc.), and resources on the ground (agricultural land, etc.). It is a primary but passive factor in production. It is primary in nature because production can not begin unless this resource is present but passive because it is dependent on other factors of production.
The characteristic feature of land are that

• it has no social cost as we did not create it we got it free
• the land is perfectly inelastic and is immobile

Capital-It is like a backbone for production. It includes machines, tools, etc. It is income, assets, money, everything that helps in the creation of input. It is a manufacturing resource. Land and labor are combined with manufactured resources in order to produce the things that we desire. These manufactured resources are called capital.
Certain features of capital are that

• it is perfectly elastic
• mobile and unlike labor, it can be increased as well as stored.

Labour – In order to produce the things we desire, a human resource must be used. That human resource consists of the productive contributions of labor made by individuals who work—for example, steelworkers, ballet dancers, etc. It is only human activity that is included thus the work performed by machines or animals is not included. Certain features of labor are that

• it is inelastic, cannot be increased beyond its availability.
• It is a mobile and active factor and can not be stored.

Entrepreneurship – There is, in effect, the fourth type of input used in production. It is a special type of human resource; it consists of entrepreneurial ability or entrepreneurship. Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business. He is the person who uses all the other uses to make the production of goods are reality.

2. Theory of production
In economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labor, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves some of the most fundamental principles of economics. These include the relationship between the prices of commodities and the prices of the productive factors used to produce them. It determines how the producer Production function – The production function relates the output of a firm to the number of inputs, typically capital and labor. It is important to keep in mind that the production function describes the technology, not economic behavior. It states how the desired output can be produced with the minimum input. There are two types of the production function
Y = F (K, L)
Y is the maximal amount of output that is possible to produce given the quantities of the inputs, capital, K, and labor, L. There are two types of the production function
(1) Short-run production function
(2) Long-run production function
1. Short run production function – in this capital input is fixed thus we are required to consider the change of labor.
Thus Y= F (K,L) only L will change
2. Long run production function – in this quantity of all the variables can be changed
Thus Y= F (K,L) K, L both can be changed.
There are two alternative theories for these production functions.

• – Law of Diminishing Returns
• – Law of Returns to scale Law of diminishing return
The law of diminishing returns is a classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. Features of law are
• – When one variable is increased keeping all other variables constant than the output of production increases till some particular point and diminishes after that.
• – To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input.
• – It is also known as Law of variable proportions because as the input of one variable i§ increased its proportion with other fixed variable changes.
• – This law is applied to short-run production.
• – Alfred Marshall agreed to the law of diminishing return Assumptions of law

The assumptions of the law of diminishing returns are as follows:

• Units of capital and labor are used as variable factors.
• The prices of the factors do not change.
• All units of variable factors are equally efficient.
• There is no change in the technique of production.
• The best combination of factors of production has crossed the level of optimum point.
• There is no change in the fixed factor of production.
• Law operates in short-run

Consider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will provide less output than the previous laborer. At this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional workers actually decrease the efficiency of the other workers, decreasing the production of the factory.
There are three stages in the law of variable proportion

(1) Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage along with this marginal product as well as average products are also increasing

(2) Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining. It is called the stage of diminishing returns because all three total products (TP), marginal product (MP), and average product (AP) are declining.

(3) Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining.
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

3. Law of returns to scale
The law of returns to scale is concerned with the scale of production. The scale of production of a firm is determined by the amount of factors units.

Changes in production occur when all resources are proportionately changed in the long run. Returns to scale come in three forms—increasing, decreasing, or constant based on whether the changes in production are proportionally more than, less than, or equal to the proportional changes in inputs. Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if the increase in output is 20 % output increases more than 20 %. The constant return to scale -Here with the increase in input-output also increases in the same proportion. Thus if the input is increased by 20% then output also increase by 20%

Decreasing returns to scale – Here with the increase in input there is a decrease in output thus returns to scale are diminishing.
Suppose, for example, that The Willy Company employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed potatoes each month. Returns to scale indicate what happens to production if the scale of operation expands to 2,000 workers in a 10,000 square foot factory-a doubling of the inputs.

If production increases to exactly 2 million Stuffed potatoes, twice the original quantity, then The Wacky Willy Company has constant returns to scale. If production increases by more than 2 million Stuffed potatoes, then The Willy Company has increasing returns to scale. And if production increases by less than 2 million Stuffed potatoes, then The Willy Company has decreasing returns to scale.

4. Theory of costs
In economics, the cost of production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. Cost is the value at which the product can be sold in the market. The cost can be determined by checking the cost of the production of good or services which includes the cost of all the inputs like land, labor etc., cost may be analyzed in two ways.

• Short run costs
• Long run costs Short run costs

In the short run, because at least one factor of production is fixed, output can be increased only by adding more variable factors. Hence we consider both fixed and variable costs. We use short run costs primarily to compute how much to produce while maximizing profits. New firms do not enter the industry, and existing firms do not exit.
(i) Fixed costs- Fixed costs are business expenses that do not vary directly with the level of output i.e. they are treated as independent of the level of production. Examples of fixed costs include the rental costs of buildings
(ii) Total cost curve – it comprises of total cost as well as total variable cost.
(iii) TFC – If output is taken on x axis and cost on y axis than total fixed cost curve is parallel to x axis.
(iv) TVC – the variable cost curve is positively related and moves up as variable cost increases. It’s origin is from zero.
(v) Total cost = TFC+TVC
Thus total cost curve is also positive in nature. .
(vi) Average cost curve – It has two categories average fixed cost and average variable cost.
(vii) AFC- it declines with the increase in output. It is rectangular hyperbola (viii) AVC – it first falls and then increases . the curve shape is like U.
Average cost curve lies above average variable cost curve
(ix) Marginal cost curve – since total fixed cost does not change in short run so marginal cost curve is dependent only on average variable cost. Thus marginal cost curve (MC) is also U shaped. MC curve lies below AVC.
Long run costs
In long run the firm can change all the inputs quantity so the cost of all input is variable. To make their long-run decisions firms look at the costs of various inputs and the technologies available for combining these inputs and then decide which combination offers the lowest cost. Characteristic features of long run costs are
As per classical approach TC increases with an increase in output, thus TC curve is straight line. Also AC and MC remains constant throughout.
As per modem economic theory firm experiences varying returns of scale. The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. The law of diminishing marginal productivity does not hold in the long run. The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. There is an envelope relationship between long-run and short-run average total costs.

• Each short-run cost curve touches the long-run cost curve at only one point.
• Thus If producing each unit of output becomes less costly there are economies of scale.
• And if producing each unit of output becomes more costly there are diseconomies of scale.
• If unit costs remain constant as output rises then there are constant returns to scale.

5. Theory of revenue
The income received by firm on selling the goods or services over a certain period of time is revenue Revenue may be measured in three ways:
Total Revenue (TR)
Average Revenue (AR)
Marginal Revenue (MR)
Total revenue – it is the total amount generated by the firm by selling all the quantity of output.
TR = quantity sold x price per unit
Average revenue – it is calculated by dividing total revenue by quantity to get price per unit
Marginal revenue – MR is the extra revenue that a firm gains when it sells one more unit of a product in a given time period. It is the ratio of change in total revenue to change in total units sold.
Different relationship between MR, AR and TR graphically For first unit
MR = AR = TR After that
When MR is positive TR slopes upwards When MR below X axis TR slopes downwards.
AR if parallel to X axis than MR also parallel to X axis
If AR is straight line than MR curve will bisect each perpendicular distance of it from Y axis.
Kinked demand curve – According to the kinked demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand At low prices, the firm faces the relatively inelastic market demand curve The two market curve intersect and form kinked demand curve. In such cases AR falls in straight line with 2 unequal slopes and 2 segments. Since the slopes of AR are unequal so they cause a jink and as a result kinked demand curve is formed.

6. Producers equilibrium
Producer’s equilibrium refers to the level of output of a commodity that gives the maximum profit to the producer of that commodity. Therefore, the output level at which ‘total revenue less total cost’ is maximum is called the equilibrium output level. According to this approach there are two conditions of producer’s equilibrium

• TR-TC Approach.
• MR-MC Approach

TR-TC Approach – A point where the difference between total revenue and total cost is maximum is the equilibrium point. The total revenue (TR) minus total cost (TC) method (TR – TC) relies on the fact that profit is equal to the difference between revenue and costs MR-MC Approach – As per this approach a firm will adjust the quantity of output it supplies until finding a point where the marginal revenue associated with selling that quantity is equal to the marginal cost of producing that quantity. That is, the firm will produce where MR = MC.

(1) MR-MC
When one more unit of output is produced, MR is the gain and MC is the cost to the producer. Clearly, so long as benefit is greater than the cost, or MR is greater than MC, it is profitable to produce more. Therefore, so long as MR is greater than MC, the maximum profit level, or the equilibrium level is not reached. The equilibrium is not achieved because it is possible to add to profits by producing more. The producer is also not in equilibrium when MR is less than MC because benefit is less than the cost. By producing less the producer can add to his profits. When MC is equal to MR, the benefit is equal to cost, the producer is in equilibrium subject to that MC becomes greater than MR beyond this level of output.

(2) MC is greater than MR after MC = MR output level
‘MC = MR’ is a necessary condition but not sufficient enough to ensure equilibrium. It is because the producer may face more than one MC =MR outputs. But out of these only that output beyond which MC becomes greater than MR is the equilibrium output. It is because if MC is greater than MR, producing beyond MC = MR output will reduce profits. And when it is no longer possible to add to profits the maximum profit level is reached. On the other hand, if MC is less than MR beyond the MC = MR output, it is possible to add to profits by producing more. Therefore this MC = MR level is not the equilibrium level. For a producer to be in equilibrium it is necessary that MC equals MR as well MC becomes greater than MR if more output is produced.

7. Economies and diseconomies of scale
There are benefits and drawbacks in increasing the size of operation of a business. Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall. A business can become so large that its unit costs begin to rise. Expanding firms can experience diseconomies of scale

8. Economies of scale
It is reduction in cost of production with increase in firm size which may be due to several reasons like administrative economies or bulk purchasing making the cost more efficient and many more.

Example: Assume you are a small business owner and are considering printing a marketing brochure. The printer quotes a price of Rs. 5,000 for 500 brochures, and Rs. 10,000 for 2,500 copies. While 500 brochures will cost you RslO per brochure, 2,500 will only cost you Rs. 4 per brochure. In this case, the printer is passing on part of the cost advantage of printing a larger number of brochures to you. This cost advantage arises because the printer has the same initial set-up cost regardless of whether the number of brochures printed is 500 or 2,500. Once these costs are covered, there is only a marginal extra cost for printing each additional brochure. _
It is divided into two categories

Internal economies of scale – They occur due to indigenous causes. Internal economies of scale arise when firms increase their scale of production. Hence, they incur lower average costs of production, either through specialization or other factors like increase in borrowing power of larger organisation, better utilization of inputs due to technical up gradation, advertising, marketing etc. When average costs fall, giving the price of the good to be constant, profit margins of these firms will be increased. Thus, the individual firm benefits from internal economies of scale. Internal economies of scale affect the firm’s average cost curve by shifting the initial position to the right along the curve.

External economies of scale – The lowering of a firm’s costs due to external factors. There are some external factors that affect the firm such as some research and development in industry. This research and development is going to help whole industry and a single firm of that industry gets the benefit which may help to reduce its cost. External economies of scale will increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company and encompass positive externalities that reduce the firm’s costs. Another factor which can*be discussed is getting the information which is a requirement for the whole industry, if this information is collectively collected than it is cheaper than a firm individually trying to get it. Thus getting the information cheaply affects the firm’s production.

9. Diseconomies of scale
After reaching a certain size, it becomes increasingly expensive to manage a gigantic organization for a number of reasons, including its complexity, bureaucratic nature and operating inefficiencies. This undesirable phenomenon is referred to as “diseconomies of scale” Internal Diseconomies of scale -When a firm expands its production scale beyond a certain level, it suffers certain disadvantages. These disadvantages are called internal diseconomies of scale. The result of this diseconomy of scale is a fall in output and an increase in the long-run average cost. There are a number of factors that might give rise to inefficiencies as the size of the firm grows,

As the size of the firm grows beyond a certain level, organization, control, and planning is needed. This makes the administrative duties more difficult. Delegation of much of the management functions to lower personnel becomes very common. Since this personnel lacks the requisite experience to undertake the task, it may result in low output at a higher cost. Again it is often difficult to arrive at quick decisions since large firm often has many entrepreneurs and directors through whom suggestions must pass before they are implemented. All these lead to an increase in the long-run average cost.

External Diseconomies of Sca/e-External factors beyond the control of a company increase its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production. External diseconomies are costs that are outside the control of a single firm and result of the growth of a specific industry. For example, negative externalities, such as road congestion, can result from the growth of an industry in a specific region. Resources may become exhausted and the price of resources may rise as demand outstrips supply.

Theory of Production, Costs and Revenue MCQ Questions

Question 1.
Production is
a. Creation of something
b. Creation of value
c. Creation of Utility
d. Both b& c
d. Both b& c

Question 2.
Characteristic feature Uncommon with the primary production of function are
a. It costs money
b. It is inelastic
c. It is immobile
d. It needs Labour
a. It costs money

Question 3.
______________ is Not present in the feature of labour
a. Active factor
b. Mobile factor
c. Elastic factor
d. All of the above
b. Mobile factor

Question 4.
If 1 orchard, 7 workers, and 3 tons of fertilizer yield 1,000 bushels of peaches, while 1 orchard, 7 workers, and 4 tons of fertilizer yield 1,300 bushels,
a. The average product of labor equal 1,150 bushels.
b. The marginal product of labor cannot be calculated.
c. The average product of fertilizer equals 1,150 bushels.
d. The marginal product of fertilizer cannot be calculated
b. The marginal product of labor cannot be calculated.

Question 5.
Which of the following statement best describes the general form of a production function?
(i) It is a purely technological relationship between quantities of input and quantities of output.
(ii) It represents the technology of an organization, sector of an economy
(iii) Prices of inputs or of the output do not enter into the production function
(iv) It is flow concept describing the transformation of inputs into output per unit of time.
a. (i), (ii) and (iv)
b. (i) and (ii)
c. (i) and (iv)
d. all of the above
d. all of the above

Question 6.
Marginal cost is:
a. the change in cost following a managerial decision
b. the change in output following a one dollar change in cost.
c. The change in cost following a unit change in output
d. The change in average cost following a one- unit change in output
c. The change in cost following a unit change in output

Question 7.
The breakeven level of output occurs when
a. marginal cost equals marginal revenue
b. marginal cost equals marginal revenue.
c. Marginal profit equals zero.
d. Total profit equals zero.
d. Total profit equals zero.

Question 8.
If there is an increase in the costs of production it will lead to
a. shift demand curve outwards
b. shift demand curve inwards
c. shift supply outwards and other things unchanged
d. shift supply inwards.
d. shift supply inwards.

Question 9.
There is an increase in price but all other things
are unchanged. This will lead to:
a. A shift in supply outwards
b. A shift in supply inwards
c. There is no change in supply
d. An extension of supply
d. An extension of supply

Question 10.
A country enjoys a comparative advantage over
another country in producing oil when
a. it has more oil than the other country.
b. It can produce oil at a lower opportunity cost than the other country
c. It does not need to import oil.
d. It wants to export oil as much as it has
b. It can produce oil at a lower opportunity cost than the other country

Question 11.
For a given short-run production, function
a. technology is assumed to change as capital stock changes.
b. Technology is assumed to change as the labor input changes.
c. Technology is considered to be constant for a given production function relationship
d. Technology is assumed to change positively until diminishing return set in and then it changes in the other direction.
c. Technology is considered to be constant for a given production function relationship

Question 12.
Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?
a. The firm’s average cost curve will shift downward.
b. The firm’s marginal cost curve will shift downward.
c. To produce an unchanged output, the firm would use more labor
d. All of the above
d. All of the above

Question 13.
Which of the following is not a reason for the existence of economies of large scale production?
b. small markets;
c. specialized workers;
d. costs not increasing in proportion to volume or output;
b. small markets;

Question 14.
Average fixed cost
a. is U-shaped.
b. Declines over the entire output range.
c. Is a long-run concept only.
d. Is influenced by diminishing returns to production.
b. Declines over the entire output range.

Question 15.
if average total cost is 100 for a given output and marginal cost is 70, we then know that average fixed cost is
a. 30.
b. 170.
c. 70.
d. Not possible to determine with the information given.
d. Not possible to determine with the information given.

Question 16.
Which of the following statements about the relationship between marginal cost and average cost is correct?
a. when MC is falling, AC is falling.
b. AC equals MC and MC’s lowest point.
c. When MC exceeds AC, MC must be rising.
d. When AC exceeds MC, MC must be rising.
c. When MC exceeds AC, MC must be rising.

Question 17.
The slope of the total variable cost curve equals
a. average variable cost.
b. Marginal cost.
c. Average cost.
d. Marginal physical product.
b. Marginal cost.

Question 18.
X believed that if people were free to pursue their own interests, then
a. greed and cheating would prevail in the market.
b. Less would be produced than if altruism were our guiding principle
c. They would generally be encouraged to produce goods and services that other valued highly (relative to their costs).
d. The public interest would be best served, but the interests of employees would be hurt.
c. They would generally be encouraged to produce goods and services that other valued highly (relative to their costs).

Question 19.
An increase in wages will lead the aggregate supply curve to
a. Remains unchanged.
b. Shift outward.
c. Shift inward
d. Becomes flat
c. Shift inward

Question 20.
An increase or decrease in consumption of a goods or services is termed as.
a. Marginal utility
b. Revenue curves.
c. Producer’s equilibrium.
d. Total utility
a. Marginal utility

Question 21.
The total cost (TC) of producing sports shoes (Q) is given as TC – 200 + 5 Q. What is the variable cost?
a. 5Q
b. 5
c. 5+ (200/Q)
d. 200
a. 5Q

Question 22.
The typical production possibilities curve is:
a. an upsloping line that is concave to the origin.
b. A downsloping line that is convex to the origin
c. A downsloping line that is concave to the origin
d. A straight upsloping line
c. A downsloping line that is concave to the origin

Question 23.
When per unit price goes up as output is increased it is
a. Diseconomies of scale
b. Economies of scale
c. Production cost
d. None of the above.
a. Diseconomies of scale

Question 24.
In the presence of a diminishing marginal rate of technical substitution between labour and capital, output can be kept unchanged only if
a. equal successive sacrifices of capital go hand in hand with even small increases of labor
b. equal successive sacrifices of capital go hand in hand with ever small increases of labor
c. equal successive increases in labor go hand in hand with ever small increases in capital
d. equal successive increases in labor go hand in hand in hand with ever small sacrifices of capital
d. equal successive increases in labor go hand in hand in hand with ever small sacrifices of capital

Question 25.
A movement along the demand curve drawn in quantity-price space to the left may because by
a. an increase in supply
b. a rise in income.
c. A rise in the price of complementary good
d. A fall in the number of substitute goods
a. an increase in supply

Question 26.
The output where diminishing returns to production begin is also the output where
a. marginal cost is at a minimum
b. average total cost is at a minimum
c. average variable costs is at a minimum
d. marginal and average cost intersects.
a. marginal cost is at a minimum

Question 27.
Which of the following statements about marginal cost is incorrect?
a. A U-shaped marginal cost curve implies the existence of diminishing returns over all ranges of output.
b. When marginal cost equals averages cost, average cost is at tits minimum
c. In the short run, the shape of the marginal cost curve is due to the law of diminishing marginal returns.
d. When marginal cost is falling, total cost is rising
a. A U-shaped marginal cost curve implies the existence of diminishing returns over all ranges of output.

Question 28.
Which of the following statements about the relationship between marginal cost and average cost is correct?
a. when MC is falling, AC is falling
b. AC equals MC and MC’s lowest point.
c. When MC exceeds AC, must be rising
d. When AC exceeds MC, MC must be rising
c. When MC exceeds AC, must be rising

Question 29.
In the short run, diminishing marginal returns are implied by
a. rising marginal cost
b. Rising average cost
c. Rising average variable cost
d. All of the above
a. rising marginal cost

Question 30.
Because of fixed cost
a. Marginal cost almost always begins below average total cost
b. Marginal cost is always equal to Total average cost
c. Marginal cost is always above total cost
d. None of the above
a. Marginal cost almost always begins below average total cost

Question 31.
If an economy is operating at a point inside the production possibilities curve,
a. its resources are being wasted.
b. The curve will begin to shift inward.
c. The curve will begin to shift outward.
d. This is a trick question because an economy cannot produce at a point inside the curve
a. its resources are being wasted.

Question 32.
In any production process the marginal product of labour equals
a. total output divided by total labour inputs.
b. Total output minus the total capital stock.
c. The change in total output resulting from a small change on the labour input
d. Total output produced by labour inputs
c. The change in total output resulting from a small change on the labour input

Question 33.
If a new motorway is built near to a company, thus reducing its costs, this is an example of:
a. commercial economies of scale
b. Financial economies of scale
c. Managerial economies of scale
d. External economies of scale
d. External economies of scale

Question 34.
Which one of the following is correct in a situation of diminishing marginal returns to labour?
a. Productions remains unchanged
b. Production is increasing
c. Production is decreasing
d. All of the above
b. Production is increasing

Question 35.
Supply of labour includes
a. Duration for which they work
b. Intensity with which they work
c. Their efficiency
d. All of the above
d. All of the above

Question 36.
Capital includes
a. assets
b. money
c. entrepreneurship
d. Both a & b
d. Both a & b

Question 37.
It is Not uncommon for the characteristic feature found in Capital
a. elasticity
c. mobile factor
d. All of the above
d. All of the above

Question 38.
In the production equation Qx = f(L,K,T ———–n), L is
a. Labour
b. Level of technology
c. Loyalty
d. None of the above
a. Labour

Question 39.
When output increases in greater proportion to input it is
a. Constant returns to scale
d. all of the above
a. Constant returns to scale

Question 40.
As per MR MC approach two conditions are required for a firm to be in equilibrium
a. Marginal revenue should be equal to marginal cost
b. Marginal cost curve should cut marginal revenue curve from below
c. Both a& b
d. None of the above
c. Both a& b

Question 41.
Which of the following best describes the law of diminishing marginal returns when an employee is increased?
a. Marginal product of the new employee will be more then that of the previous employee.
b. Marginal product of the new employee will be less then the previous employee.
c. It will remain unchanged
d. None of the above
b. Marginal product of the new employee will be less then the previous employee.

Question 42.
Price exceeds Average variable cost but is smaller than average Total cost at the optimum level of output, the firm is
a. making a profit and should continue to produce
b. incurring a loss but should continue to produce
c. incurring a loss and should stop producing immediately
d. break even and maintain current output
b. incurring a loss but should continue to produce

Question 43.
The wages paid out to casual workers can be considered
a. at fixed cost
b. at variable cost
c. partly at variable and partly at fixed cost
d. at opportunity cost
b. at variable cost

Question 44.
Which of the following industries most closely approximates perfectly competitive market in India?
a. automobile
b. newspapers
c. beverages
d. sachet pure water
d. sachet pure water

Question 45.
The following are some of the economic factors influencing the location of an enterprise in India except
a. nearest to state capital
b. availability of raw materials
c. nearest to power supply
d. availability of transportation system
a. nearest to state capital

Question 46.
Average cost is defined as
a. Average cost divided by marginal cost.
b. total cost divided by total output
c. total output divided by average cost
d. total output times marginal cost
b. total cost divided by total output

Question 47.
The marginal cost when output = 10 is equal to
a. the slope of a line drawn tangent to the total cost curve where output = 10.
b. The total cost of 10 units of output divided by its average cost.
c. The average cost of 10 units
d. None of the above.
c. The average cost of 10 units

Question 48.
How will a decrease in the equilibrium price in the market of a perfectly competitive industry affect the total revenue of a typical firm
a. Both total revenue and economic profit will increase at all rates of output
b. Both total revenue and economic profit will remain same
c. Both total revenue and economic profit will decrease at all rates of output
d. None of the above are true
c. Both total revenue and economic profit will decrease at all rates of output

Question 49.
The perfectly competitive firm’s short run supply curve is same as the
a. total revenue
b. Supply of other firms in the industry
c. Upward sloping portion of its marginal cost curve at or above minimum AVC curve
d. Upward sloping portion of its MR curve
c. Upward sloping portion of its marginal cost curve at or above minimum AVC curve

Question 50.
If average cost is at a minimum, then
a. it is equal to marginal cost.
b. Total cost is also at a minimum
c. Profit is at a maximum
d. All of the above are true
d. All of the above are true

Question 51.
The marginal principle asserts that, in general, the net benefit is maximized when
a. total benefit will be equal to total cost.
b. Average benefit will be equal to average cost.
c. Marginal benefit will be equal to average cost.
d. Average cost will be above total cost but below average benefit.
c. Marginal benefit will be equal to average cost.

Question 52.
Supply curve reflects
a. Total cost curves.
b. Average cost curves.
c. Marginal cost curves.
d. Average production curves.
c. Marginal cost curves.

Question 53.
A constant cost industry is distinguished by the fact that
a. The long run industry supply curve is perfectly inelastic
b. The long run industry supply curve is perfectly elastic
c. average revenue is equal to zero
d. none of the above is correct
b. The long run industry supply curve is perfectly elastic

Question 54.
If both average cost (AC) and marginal cost (MC) are U shaped, then
a. AC will reach a minimum at a level of output that is less than that at which MC reaches a minimum
b. AC> MC
c. AC will reach a minimum at a level of output that is greater than that at which MC reaches a minimum
d. AC =MC.
c. AC will reach a minimum at a level of output that is greater than that at which MC reaches a minimum

Question 55.
If a firm’s marginal revenue is greater than its marginal cost, then the firm should
a. increase output to increase profit
b. decrease output to increase profit
c. Increase input to decrease profit
d. Marginal revenue should be changed
a. increase output to increase profit

Question 56.
In a firm’s average revenue is equal to its average cost, then
a. profit is at a maximum
b. profit is at a minimum
c. profit is equal to zero
d. the firm is in equilibrium
c. profit is equal to zero

Question 57.
From the given option-

 Figure Time period for supply Figure (i) (A) Very long run. Figure (ii) (B) Short run Figure (iii) (C) Long run Figure (iv) (D)Yery long run.

a. (a): (i) (B), (ii) (0), (iii) (A), (iv) (C)
b. (i) (A), (ii) (B), (iii) (C), (iv) (0).
c. (i) (B), (ii) (C), (iii) (0), (Iv) (A)
d. (i) (C), (ii) (0), (iii) (B), (iv) (A)
a. (a): (i) (B), (ii) (0), (iii) (A), (iv) (C)
Hint
Short run – in this not frequent changes in quantity but frequent changes in prices. Long run – in this frequent changes in quantities but price change is not frequent. Very long run – no change in price in respect to quantity supplied.
Very short run – quantity supplied does not change but price changes.

Question 58.
Marginal product is-
a. Addition to total product by increase in additional units of all inputs
b. Change in total product caused by a fall in additional units of all inputs
c. ≅QO/≅N where II stands for change, TQ stands for total products and N stands for units of a single variable input.
d. ≅N/≅TQ
c. ≅QO/≅N where II stands for change, TQ stands for total products and N stands for units of a single variable input.
Hint
≺≺≺≺Q/≺N where △Stands for change, TQ stands for total products and N stands for units of a single variable input.
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.

Question 59.
Average product is rising then marginal product would
a. Keep rising
b. Be more than average product
c. Would be less than the average product
d. Be indeterminate because the units of
b. Be more than average product
Hint
Average product is rising then marginal product would be more than average product The relation between average product and the marginal product is

• If the marginal is less than the average, then the average declines.
• If the marginal is greater than the average, then the average rises.
• If the marginal is equal to the average, then the average does not change,

Question 60.

 Table A Table B Table C Table D X Input Y Output X Input Y Output X Input Y Output X Input Y Output 1 5 2 4 1 8 4 40 2 10 4 8 3 24 4 60 3 15 6. 12 10 80 4 80

Which of these does not represent fixed proportion of inputs and outputs of X and Y respectively-
a. Table A
b. Table B
c. Table C
d. Table D
d. Table D
Hint
In table D inputs are not changing in corresponding to output which is changing while in all other tables input is changing in fixed proportion in relation to output as in Table A with 1 unit increase in input, output is increasing 5 units. In table B with 1 unit increase in input, output increases 2 units. In table C with 1 unit increase in input, output increases 8 units.

Question 61.
Which one of the following short run cost curves always falls with an increase in the level of output?
a. Average fixed cost curve
b. Total fixed cost curve
c. Average variable cost curve
d. Total cost curve.
a. Average fixed cost curve
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola Average fixed cost curve always falls with an increase in the level of output.

Question 62.
Which of the following figures given below represents correct relationship between AC and MC:-

a. Figure (i)
b. Figure (ii)
c. Figure (iii)
d. Figure (iv)
c. Figure (iii)
Hint
The relationship between the marginal cost and average cost is the same as that between any other marginal-average quantities. When marginal cost is less than average cost, average cost falls and when marginal cost is greater than average cost, average cost rises.

Question 63.
From the following output schedule, the value of Marginal Product against Y will be

 Unit of Variable Input Total Product Marginal Product 4 60 15 7 90 Y

a. 30
b. 90
c. 40
d. 10
d. 10
Hint
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.
Marginal Product = □ □□Q/DN whereA stands for change, TQ stands for total products and N stands for units of a single variable input. MP = 90-60/7-4 = 30/3 = 10

Question 64.
in a graph, when we plot AC and AFC curves, the difference between AC and AFC curves measures
a. TFC
b. WC
c. AVC
d.MC
c. AVC
Hint
Average cost curve – it has two categories average fixed cost and average variable cost. AFC- it declines with the increase in output. It is rectanguiar hyperbola AVC – it first falls and then increases . the curve shape is like U. Average cost curve lies above average variable cost curve AC = AFC+AVC AC- AFC = AVC

Question 65.
Marginal cost at any level of output is affected
a. Only by fixed costs
b. Only by variable costs
c. Both by fixed costs and variable costs
d. More by fixed costs and less by variable costs.
b. Only by variable costs
Hint
Marginal cost curve – since total fixed cost doesnot change in short run so marginal cost curve is dependent only on average variable cost. Thus marginal cost curve (MC) is also U shaped. MC curve lies below AVC.

Question 66.
if on a given straight line demand curve, elasticity of demand is equal to unity, the value of marginal revenue will be
a. Indeterminate
b. Zero
c. Infinite
d. Maximum
b. Zero
Hint
In a straight-line demand curve we know that the elasticity at the middle point is equal to one. It follows that marginal revenue corresponding to the middle point of the demand curve (or AR curve) will be equal to zero.

Question 67.
Long-run average cost curve falls due to the application of:
a. The law of increasing returns to a factor
b. The law of increasing returns to scale
c. The law of variable proportions
d. The law of demand.
b. The law of increasing returns to scale
Hint
In long run the firm can change all the inputs quantity so the cost of ail input is variable .To make their long-run decisions firms look at the costs of various inputs and the technologies available for combining these inputs and then decide which combination offers the lowest cost. As per modern economic theory firm experiences varying returns of scale .The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. Long-run average cost curve falls due to the application of the law of increasing returns to scale.

Question 68.
Which of the following statements is not true?
a. As average product rises, marginal product will be more than the average product
b. As average product rises, marginal product will keep on rising
c. Marginal product will be equal to average product when average product is maximum
d. If marginal product becomes negative, total product will begin to fall.
c. Marginal product will be equal to average product when average product is maximum
Hint
The relation between average product and marginal product is

• If the marginal is less than the average, then the average declines.
• If the marginal is greater than the average, then the average rises.
• If the marginal is equal to the average, then the average does not change
• If marginal product becomes negative, total product will begin to fall

Question 69.
Which one of the following graphs is the correct presentation of the relationship between average product and marginal product? (Q is quantity of output and N is unit of variable factor).

The correct option is:
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
d. Figure 4
Hint
There are three stages in law of variable proportion
(1) Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage . along with this marginal products as well as average products are also increasing
(2) Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining . It is called stage of diminishing returns because all three total product (TP), marginal product (MP) and average product (AP) all are declining.
(3) Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining but never zero.
In figure 2 and 3 AP is being shown negative which is wrong.

Question 70.

 Unit of variable factors Total Product units 1 30 2 70 3 120

In the product schedule as given above, the marginal proddct of the 4th unit of input would be:
a. 30 units
b. 60 units
c. 70 units
d. 25 units.
b. &0 units
Hint
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.
Marginal Product = >
pnnQ/DN where Astands for change, TQ stands for total products and N stands fpr units of a single variable input.
MP for 1st unit =30-0/1 =30
MP for 2nd unit = 70-30/1 =40
MP for 3rd unit = 120-70/1 = 50
MP for 4th unit = 60 (by looking at the sequence)

Question 71.
Which of the following tables represents diminishing returns to scale? (In the tables – K stands for Capital, L for Labour and TP for Total Production)

 Table 1 K L TP K L TP K L TP K L TP 1 2 10 1 2 10 1 2 10 1 2 10 2 4 30 2 4 20 2 4 18 2 4 50 4 8 100 4 8 40 4 8 35 4 8 200

The correct option is: _
a. Table 1
b. Table 2
c. Table 3
d. None of the above
c. Table 3
Hint
Decreasing returns to scale – Here with the increase in input there is decrease in output thus returns to scale are diminishing. Suppose, for example, that The Willy Company employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed potatoes each month. Returns to scale indicate what happens to production if the scale of operation expands to 2,000 workers in a 10,000 square foot factory–a doubling of the inputs. If production increases to exactly 2 million Stuffed potatoes, twice the original quantity, then The Wacky Willy Company has constant returns to scale. If production increases by more than 2 million Stuffed potatoes, then The Willy Company has increasing returns to scale. And if production increases by less than 2 million Stuffed potatoes, then The Willy Company has decreasing returns to scale.
AP= TP/Q
So for table 1 AP = 5,7.5,12.5 respectively for 1st, 2nd and 3rd unit
Similarly for table 2 AP = 5,5,5 respectively
For table 3 AP = 5,4.5,4.38 respectively
For table 4 AP = 5,12.5,25 respectively

Question 72.
Laws of returns to scale are based on the assumption of:
a. Variable proportions of factor-inputs
b. Fixed proportions of factor-inputs
c. Excess demand for fixed inputs
d. Deficient demand for fixed inputs.
a. Variable proportions of factor-inputs
Hint
The law of returns to scale is concerned with the scale of production. The scale of production of a firm is determined by the amount of factors units.
Changes in production occur when all resources are proportionately changed in the long run. Returns to scale come in three forms-increasing, decreasing, or constant based on whether the changes in production are proportionally more than, less than, or equal to the proportional changes in inputs.

Question 73.
Which of the following expressions is not correct?
a. MC — TC<sub>N</sub> – TCN<sub>N_1</sub>
b. MC = TC/<sub>≺</sub>N
c. MC = <sub>≺</sub>TVC/<sub>≺</sub>N
d. MC=<sub>≺</sub>TFC/<sub>≺</sub>N.
d. MC=<sub>≺</sub>TFC/<sub>≺</sub>N.
Hint
Marginal cost curve – since total fixed cost doesnot change in short run so marginal cost curve is dependent only on average variable cost.

Question 74.
Match the following:

 X. U-shaped curve (i) AC = MC Y. Rectangular Hyperbola (ii)TC Z. Continuously rising curve (iii) AFC W. Optimum output (iv) AC

“The correct option is
a. X (iv); Y (iii); Z (ii); W (i)
b. X (iii); Y (ii); Z (i); W (iv)
c. X (ii); Y (i); Z (iii); W (iv)
d. X (i); Y (iv); Z (ii); W (iii).
a. X (iv); Y (iii); Z (ii); W (i)
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola TC(Total cost) = TFC+TVC
Total cost curve is also positive in nature thus continuously rising curve
AC -Average cost curve lies above average variable cost curve and is U shaped.
AC=MC – gives optimum output.

Question 75.
Under Production Theory, the expression ax = f(L.K) represents:
a. Demand function
b. Revenue function
c. Cost function
d. Production function.
d. Production function.
Hint
Production Function – The production function relates the output of a firm to the amount of inputs, typically capital and labor.
Y = F (K, L)
Y is the maximal amount of output that is possible to produce given the quantities of the inputs, capital, K, and labor, L.

Question 76.
Study the three tables given below –

 Table-1 Table-2 Table-3 Input -X Input -Y Input -X Input -Y Input -X Input -Y 1 20 1 10 1 20 2 10 2 10 2 16 3 4 3 10 3 8

Which of the above tables is showing fixed factor proportions –
a. Table -1
b. Table-2
c. Table – 3
d. None of the above.
d. None of the above.
Hint
Fixed factor proportions means the capital labour ratio will be same at all levels of production.

Question 77.
Which of the following figures is showing correct relationship between average product and marginal product under production theory?

Figure 3
Correct option is
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
c. Figure 3
Hint
There are three stages in law of variable proportion
1 Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage, along with this marginal products as well as average products are also increasing
2 Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining. It is called stage of diminishing returns because all three total product (TP), marginal product (MP) and average product (AP) all are declining.
3 Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining but never zero

Question 78.
With an increase in the units of a variable input, total product keeps rising at a constant rate, marginal product curve will be best represented as a-
a. Rising straight line
b. Falling straight line
c. Vertical straight line
d. Horizontal straight line.
a. Rising straight line
Hint
With an increase in input TP keeps rising at constant rate MP will also rise and represent a straight line.

Question 79.
In the production theory, the optimum level of output is represented at a point where
a. Marginal product curve begins to fall
b. Average product curve begins to fall
c. Marginal product becomes zero
d. Average product becomes zero.
c. Marginal product becomes zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for production.

Question 80.
Increasing returns to scale are obtained when –
a. Fixed factors begin to yield increasing marginal returns
b. Proportionate increase in output is more than the proportionat increase in inputs .
c. The total output reflects an erratic behaviour
d. None of the above.
b. Proportionate increase in output is more than the proportionat increase in inputs .
Hint
Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if increase in output is 20 % output increases more than 20 %.

Question 81.
Subsistence production means –
a. Self consumption
b. Self utilization
c. Self-reliance
d. None of these
a. Self consumption
Hint
Subsistence agriculture is self-sufficiency farming in which the farmers focus on growing enough food to feed themselves and their families.

Question 82.
When TP is maximum, then MP will-
a. Start declining
b. Be negative
c. Be declining above AP
d. Be Zero
d. Be Zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

Question 83.
Which of these is not a variable factor for the agriculture sector?
a. Land
b. Labour
c. Fertilizers
d. Machinery and Equipment
a. Land
Hint
The term factors of production relate to the key factors that go into making goods. The resources that are required for production can be divided into four major groups.

• Land
• Capital
• Labour
• Entrepreneurship

In case of agriculture land is not a variable factor. A characteristic feature of land are that

• it has no social cost as we did not create it we got it free
• land is perfectly inelastic and is immobile

Question 84.
Which of these is a passive factor of production?
a. Land
b. Labour
c. Capital
d. None of these
a. Land
Hint
Land – It is a natural resource which can not be created. It includes the resources that are above ground (climate , rain etc.), resources that are below the ground (mineral resources etc.) and resources on the ground (agricultural land etc.). It is primary but passive factor in production . it is primary in nature because production can not begin unless this resource is present but passive because it is dependent on other factors of production.

Question 85.
Which one of the following factors of production gets profit as reward?
a. Land
b. Labour
c. Capital
d. Entrepreneur
d. Entrepreneur
Hint
Entrepreneurship – There is, in effect, a fourth type of input used in production. It is a special type of human resource; it consists of entrepreneurial ability, or entrepreneurship. Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business. He is the person who uses all the other uses to make production of goods are reality.

Question 86.
Land is a good or not?
a. Yes, it is a good
b. No, it is not a good
c. It may be a good
d. None
b. No, it is not a good
Hint
The land is a natural resource that can not be created. It is not a good but a fixed factor of production.

Question 87.
When the input is increased by 80%, output increases by 100%. This is known as¬
d. None of these
Hint
Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if increase in output is 20 % output increases more than 20 %.

Question 88.
a. Long run
b. Short run
c. Very short run
d. Very Long run
a. Long run
Hint
Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Question 89.
When the production is increasing, then AFC will be-
a. Increasing
b. Decreasing
c. Constant
d. None of the above
b. Decreasing
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola.

Question 90.
What will we get from fixed factor “Land”?
a. Profit
b. Wages
c. Interest
d. Rent
d. Rent
Hint
Land generates rent while.

Question 91.
Which of the following is correct about long run production function?
a. In Long run production function, quantity of all outputs varies
b. In Long run production function, quantity of one input varies while quantities of all other inputs remain constant.
c. In Long run production function, quantity of all inputs varies
d. In Long run production function, the quantity of all inputs remain constant
c. In Long run production function, quantity of all inputs varies
Hint
Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Question 92.
For which factor of production, the supply price for society is zero?
a. Capital.
b. Labour
c. Land
d. Material
c. Land
Hint
A characteristic feature of land are that

• it has no social cost as we did not create it we got it free
• land is perfectly inelastic and is immobile

Question 93.
As per theory of cost, Average Fixed Cost (AFC) curve is
a. Convex and upward sloping
b. Concave and upward sloping
c. Concave and downward sloping
d. Convex and downward sloping
d. Convex and downward sloping
Hint
AFC- it declines with the increase in output. It is a rectangular hyperbola. It is convex and downward sloping

Question 94.
As per the theory of revenue, If price is denoted by (P) and quantity is denoted by (0), then the total revenue (TR) will be:
a.$$\frac { P }{ Q }$$
b. $$\frac { Q }{ P }$$
c. P × Q
d. P × $$\frac { P }{ Q }$$
c. P × Q
Hint
The income received by a firm on selling the goods or services over a certain period of time is revenue.
Total revenue – it is the total amount generated by the firm by selling all the quantity of output.
TR = quantity sold x price per unit

Question 95.
Which of the following explains the functional relationship between ‘input and output?
a. Production Function
b. Demand Curve
c. Input Function
d. Consumer Surplus
a. Production Function
Hint
Production function – The production function relates the output of a firm to the number of inputs, typically capital and labor: It is important to keep in mind that the production function describes the technology, not economic behavior. It states how the desired output can be produced with the minimum input.

Question 96.
When a total product is maximum, then the marginal product will be:
a. Each one is possible
b. Positive
c. Zero
d. Negative
c. Zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

Question 97.
Which of the following is known as an increase in total output that results from a one-unit increase in the input keeping all other inputs constant:
a. Average product
b. Total product
c. Marginal product
d. All are correct
c. Marginal product
Hint
An increase in total output that results from a one-unit increase in the input keeping all other inputs constant is a Marginal product.

Question 98.
According to the Law of Constant Returns to Scale, what is the rate of increase in output?
a. Output increases with a lesser speed than the increase in inputs
b. Output increases with a greater speed than the increase in inputs
c. Output Increases with the same speed as inputs
d. Output increases with a constant speed irrespective of the increase in inputs.
c. Output Increases with the same speed as inputs
Hint
The constant return to scale —Here with the increase in input-output also increases in the same proportion. Thus if the input is increased by 20% than an output also increase by 20%

Question 99.
If a firm’s wage cost increases, this will cause:
a. Average fixed cost will rise as output will increase
b. The marginal cost to increase as output falls
c. Marginal revenue to increase as output to fall
d. Opportunity cost to increase, the firm will dose.
b. The marginal cost to increase as output falls
Hint
If wage cost increases MC will increase.

Question 101.
For using which factor of production, profit is the economic reward?
a. Labour
b. Entrepreneur
c. Land
d. Capital.
b. Entrepreneur
Hint
Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business, He is the person who uses all the other uses to make the production of goods are reality.

Question 101.
Which of the following is not an assumption of production function?
a. The firm uses its output at the maximum level of efficiency
b. The level of technology remains constant
c. The firm uses its maximum level of efficiency to increase the output
d. The firm uses its inputs at the maximum level of efficiency