Economics 6 Marks Question

Output (units)	Average Fixed Cost ₹	Average Variable Cost ₹	Marginal Cost ₹	Total Cost ₹
1	120	40	40	160
2	60	56	72	232
3	40	54	50	282
4	30	54	54	336
5

The Phases are:Phase: I MP rises up to A
Phase: II MP falls but is positive i.e. between A and B.
Phase: III MP falls and is negative i.e. after B
Reasons:
Phase I: Initially variable input is too small as compared to the fixed input, As production is increased there is specialisation of variable inputs and efficient use of the fixed input leading to rise in productivity of the variable input. As a result, MP raises.
Phase II: After a level of output a pressure on fixed input leads to fall in productivity of the variable input. MP starts falling but remains positive.
Phase III: The amount of variable input becomes too large in comparison to the fixed input causing decline in total product. MP becomes negative.

Output	Total cost	AVC	MC	AFC
0	30	-	-	-
1	55	25	25	30
2	78	24	23	15
3	99	23	21	10
4	122	23	23	7.5
5	150	24	28	6

Output (units)	Average Fixed Cost ₹	Marginal Cost ₹	Average Variable Cost ₹	Average Cost ₹
1	60	20	20	80
2	30	18	19	49
3	20	16	18	38
4	15	18	18	33
5	12	23	19	31

1. False: When MR is constant and not equal to zero, it may be positive or negative TR increases when MR is positive and decreases when it is negative.
2. False: AVC will rise only when MC>AVC whether MC is rising or falling.
3. False: TP increases under Increasing Returns. It also increases under Diminishing returns till MP is positive. TP falls under Diminishing returns when MP is negative.

Units of variable factor	TP (Units)	MP (Units)
1	2	2
2	6	4
3	9	3
4	9	0
5	6	-3

1. MP increases and TP increases at an increasing rate. (upto 2 units of variable factor)
2. MP falls and is positive and TP increases at a decreasing rate. (from 3rd to 4th unit of variable factor)
3. MP falls and is negative, TP falls. (after 4 units of variable factor)

1. It is false. Average cost falls only when marginal cost is less then average cost. Even when MC is rising but is less than AC AC will fall.
2. It is false. The difference between ATC and AVC is AFC and AFC is never constant.
3. It is false. Total revenue is maximum when marginal revenue is zero.

Units of Capital	Units of Labour	Total Output	% Change in Inputs	% Change in Output	Returns to Scale
20	150	3000	-	-	-
40	300	7500	100	150	Increasing.
60	450	12000	50	60	Increasing.
80	600	16000	33	33	Constant.
100	750	18000	25	13	Decreasing.

Units of Variable (input)	TPP (units)	MPP (units)	Phase
1	10	10	TPP rises at increasing rate.	Phase I
2	22	12	MPP rises.
3	30	8	TPP rises at decreasing rate.	Phase II
4	35	5	MPP falls but is Positive.
5	30	- 5	TPP falls but is Positive.	Phase III

Output (Units)	AFC (Rs.)	TFC (Rs.)	MC (Rs.)	TVC (Rs.)	AVC (Rs.)	TC (Rs.)
1	60	60	32	32	32	92
2	30	60	30	62	31	122
3	20	60	28	90	30	150
4	15	60	30	120	30	180
5	12	60	35	155	31	215
6	10	60	43	198	33	258

Output Units	Marginal Cost ₹	Average Variable Cost ₹	Total Cost ₹	Average Fixed Cost ₹
1	60	60	120	60
2	54	57	174	30
3	48	54	222	20
4	54	54	276	15
5	69	57	345	12

Output units	Total cost Rs.	Average variable cost Rs.	Marginal cost Rs.	Average fixed costRs.
0	30
1	50	20	20	30
2	68	19	18	15
3	84	18	16	10
4	102	18	18	7.5
5	125	19	23	6

The Phases are:Phase: I TP rises at increasing rate i.e. up to A in diagram.
MP rises i.e. up to 'a'.Phase: II TP rises at decreasing rate i.e. between A and B. MP falls and remains positive between 'a' and 'b'.
Phase: III TP falls i.e. after B. MP falls and is negative i.e. after 'b'.

Output units	Total cost Rs.	Average variable cost Rs.	Marginal cost Rs.	Average fixed costRs.
0	30
1	50	20	20	30
2	68	19	18	15
3	84	18	16	10
4	102	18	18	7.5
5	125	19	23	6

The curves is called production possibilities frontier or curve. Properties:

1. PPF slope downwards from left to right:

It is because to produce more quantity of one good, some quantity of other good has to be sacrificed because resources are limited.

2. PPF is Concave:

This implies that slope of the curve (i.e. marginal rate of transformation) increases as we move along the curve from left to right. MRT increases because no resource is equally efficient in production of all goods so that to obtain more quantity of one good, the quantity of the other good is sacrificed at an increasing rate.

Output units	Total cost Rs.	Average variable cost Rs.	Marginal cost Rs.	Average fixed costRs.
0	30
1	50	20	20	30
2	68	19	18	15
3	84	18	16	10
4	102	18	18	7.5
5	125	19	23	6

According to the Law of Variable Proportions, when only one input is increased while others are held unchanged, MP and TP change in the following manner:
Phase-I: MP increases and TP increases at increasing rate i.e. up to A on TP curve (upto K on MP curve) because there is under utilization of the fixed input.
Phase-II: MP decreases but is positive and TP increases at decreasing rate i.e. up to B on TP curve (upto L on MP curve) because there is pressure on fixed input.
Phase III: MP decrease and is negative and TP falls i.e. after B on TP curve (after L on MP curve) because there is too much of variable input in relation to fixed input.

Price per unit	OUTPUT	TR	TC	MR	MC
(Rs.)	(Units)	(Rs.)	(Rs.)	(Rs.)	(Rs.)
8	1	8	6	8	6
7	2	14	11	6	5
6	3	18	15	4	4
5	4	20	18	2	3

There are two conditions of producer’s equilibrium:

1. MC = MR
2. MC is greater than MR after equilibrium level of output.

The conditions are fulfilled at 3 units of output.

1. False because when TR is constant. AR will fall as output increases.
2. True, provided MC
3. False, because AP falls only when MP

1. False because diminishing returns means diminishing MP, and so long as MP is positive, TP increases even though MP is falling.
2. False because when MP decreases, TP will increase so long as MP is positive.
3. False because MR = 0 is possible when TR is constant and as TR is constant AR will fall as output is increased.

Three diffrent Situations of return to scale with numerical examples Reason behind increasing and diminishing returns to scale.

Statement of law through TP.Statement of law through MP.
Reasons behind the law.

Statement of three phases of law of variable proportion in terms of total physical product using the diagram.

Output (Units)	F.C. (Rs.)	M.C. (Rs.)	TVC (Rs.)	AVC (Rs.)	TC (Rs.)
1	12	9	9	9	21
2	12	7	16	8	28
3	12	2	18	6	30
4	12	4	22	5.5	34
5	12	8	30	6	42
6	12	12	42	7	54

Relationship among MC, AVC & AC:
When,
MC < ATC or AVC, ATC or AVC falls
MC = ATC or AVC, ATC or AVC constant
MC > ATC or AVC, ATC or AVC rises.

Diminishing returns to a variable input referred to a stage in production when with the employment of more and more units of variable factor with the given fixed factor, marginal product (MP) decreases and total product (TP) increases at diminishing rate.
Reasons for the decreasing returns to a variable factor are:

1. Over-utilisation of the fixed factor: As we keep on increasing the variable factor along with the fixed factor eventually a position comes when the fixed factor has its limits and starts yielding diminishing returns.
2. Improper coordination between Fixed and Variable factors: After a certain level of employment, the production process becomes too crowded with the variable input and factor proportion tends to become less and less suitable for the production.

1. For producing a commodity, a firm requires factor inputs (like services of land, labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.).
2. Actual money spent by a firm on Pats buying and hiring of factor and non factor inputs is called explicit cost. As per question, a producer is hiring the labour, than the wages and salary paid to labour is a explicit cost.
3. Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself. As, per question, if a producers start a business by investing his own savings, than the imputed interest on self-supplied capital he earned is a implicit cost.

Average cost will fall when AVC per unit of output remains constant. It is so because AC includes AFC also and AFC always fall with increase in production. It can be explain with the help of given diagram.
In the given diagram AVC is constant from the range of output OQ to OQ,. As we know, AC is sum of AVC and AFC. It can be seen from the above diagram that when AVC is constant AFC is falling which makes the Average Cost to fall. So, when AVC remains constant, AC falls.

1. For producing a commodity, a firm requires factor inputs (like services of land, labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.).
2. Actual money spent by a firm on buying and hiring of factor and nonfactor inputs is called explicit cost. As per question, a farmer takes a farm on rent. So, the rent he pays to landlord is the explicit cost.
3. Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself. As per question, if a farmer carries on farming with the help of family members, even then the imputed wages will be an implicit cost.

Case I-When Calculating Accounting Cost Depreciation is a Explicit Cost:

1. Explicit cost = Interest on borrowings = 180 1500 thousand @12%) + Wages paid = 120 + Depreciation = 100 = Total 400 (Rs in Thousand).
2. Implicit cost: Imputed interest on Own investment of 500 (2000-1500) Thousand.

@ 12% = 60 + Rental value = 100 + Imputed value of the owner's services = 240 = Total 400 R in Thousand).
Case II--When Calculating Economic Cost Depreciation is a Implicit Cost:

1. Explicit cost = Interest on borrowings = 180 R1500 thousand @12%) + Wages paid = 120 = Total 300 ( in Thousand).
2. Implicit cost: Imputed interest on Own investment of 500(2000-1500) Thousand.

@ 12% = 60 + Rental value = 100 + Imputed value of the owner's services = 240 + Depreciation = 100 = Total 500€ in Thousand).

1. Diminishing returns determines the shape of both of these curves.
2. When marginal product is rising, marginal cost is falling.
3. When diminishing returns occur, marginal product begins falling and marginal cost begins rising.

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Total Fixed Cost: This refers to the costs incurred by a firm in order to acquire the fixed factors for production like cost of machinery, buildings, depreciation, etc. In short run, fixed factors cannot vary and accordingly the fixed cost remains the same through all output levels. These are also called overhead costs.
Total Variable Cost: This refers to the costs incurred by a firm on variable inputs for production. As we increase quantities of variable inputs, accordingly the variable cost also goes up. It is also called 'Prime cost' or 'Direct cost' and includes expenses like - wages of labour, fuel expenses, etc.
Total Cost (TC): The sum of total fixed cost and total variable cost is called the total cost.
Total cost = Total fixed cost + Total variable cost
TC = TFC + TVC

Relationship between TC, TFC, and TVC:

1. TFC curve remains constant throughout all the levels of output as fixed factor is constant in short run.
2. TVC rises as the output is increased by employing more and more of labour units. Till point Z, TVC rises at a decreasing rate, and so the TC curve also follows the same pattern.
3. The difference between TC and TVC is equivalent to TFC.
4. After point Z, TVC rises at an increasing rate and therefore TC also rises at an increasing rate.
5. Both TVC and TFC is derived from TC i.e. TC = TVC + TFC.

Producer's equilibrium refers to a situation, where a producer is producing that level of output, at which its profits are maximum. In other words, it is a situation of profit maximisation or cost minimisation (under MR and MC approach).
Following schedule explain the producer's equilibrium Conditions of producer's equilibrium:

Units of output (Q)	MR (₹)	MC (₹)
1	12	15
2	12	12 MR = MC
3	12	10 MR > MC
4	12	9
5	12	8
6	12	7
7	12	8
8	12	9
9	12	10
10	12	12 Producer's equilibrium MR = MC

Following are the two conditions of producer's equilibrium:

1. MR = MC (Marginal Revenue = Marginal Cost)
2. MC must be rising at the point of equilibrium or MC curve must cut MR curve from below.

In the given schedule MR = MC, both at 2 units and 10 units of output, but the second condition of rising MC is fulfilled only at 10th unit of output. So, the producer is in equilibrium when he is producing 10 units.

Producer's equilibrium refers to a situation of profit maximisation or cost minimisation. To study producer's equilibrium, two approaches are used

1. Total Revenue and Total Cost approach: Under this approach, a producer is deemed to be in equilibrium, on the fulfillment of the following two conditions

1. The difference between TR and TC is the maximum.
2. Total profits are falling after this level of output.

2. Marginal Revenue and Marginal Cost approach Under this approach, a producer attains equilibrium on the fulfillment of the following two conditions:

1. MR = MC
2. MC is rising after the point of equilibrium.

Break-even for a firm occurs when it is able to cover all its costs of production. Accordingly, break-even point is defined as a situation when AR = AC or TR = TC. This is a condition of ‘no profit-no loss' for the firm. But, still the firms are able to earn normal profits, as normal profits are an element of cost.

Break-even occurs at points S.
Here, AR = AC.

TVC = Raw material purchased + salary (no. of workers * salary paid to each worker)
= 6000 + (200 ~ 50) = 6000 + 10000 = 16,000 \
TFC = Rent + Interest on capital + Insurance premium paid
= 10000 + 5000 + 1500 = 16500
TC = TVC + TFC = 16,000 + 16500 = 32,500
AFC = 165 AVC = 160 ATC = 325