Important Questions
Multiple Choice Questions-
Question 1. In production function, production is a function of:
(a) Price
(b) Factors of Production
(c) Total Expenditure
(d) None of these
Question 2. The basic reason of operating the Law of Diminishing Returns is:
(a) Scarcity of Factors
(b) Imperfect Substitution between Factors
(c) Both (a) and (b)
(d) None of the above
Question 3. Which of the following explains the short-run production function ?
(a) Law of Demand
(b) Law of Variable Proportion
(c) Returns to Scale
(d) Elasticity of Demand
Question 4. Long-run production function is related to:
(a) Law of Demand
(b) Law of Increasing Returns
(c) Laws of Returns to Scale
(d) Elasticity of Demand
Question 5. In which stage of production a rational producer likes to operate in shot-run production ?
(a) First Stage
(b) Second Stage
(c) Third Stage
(d) None of these
Question 6. Law of variable proportion explains three stages of production. In the first stage of production:
(a) Both MP and AP rise
(b) MP rises
(c) AP Falls
(d) MP is zero
Question 7. At which time all the factors of production may be changed ?
(a) Short run
(b) Long run
(c) Very Long run
(d) All the three
Question 8. Production function is expressed as:
(a) Qx = Px
(b) Qx = f(A, B, C, D)
(c) Qx = Dx
(d) None of these
Question 9. Which factors among following we find in short-run production process ?
(a) Fixed Factors
(b) Variable Factors
(c) Both (a) and (b)
(d) None of these
Question 10. The cycle which increases first and after being constant starts to reduce is called :
(a) APP
(b) MPP
(c) TPP
(d) All of these
Question 11. Which of the following is a saurce of production ?
(a) Land
(b) Labour
(c) Capital
(d) All of these
Question 12. Law of variable proportion is related to :
(a) Both short-run and long run
(b) Long-run
(c) Short-run
(d) Very Long-run
Question 13. An active factor of production is:
(a) Capital
(b) Labour
(c) Land
(d) None of these
Question 14. If all the factors of production are increased by same proportion and as a result
output increases by a greater proportion than it is called :
(a) Constant returns to scale
(b) Decreasing returns to scale
(d) All of these
(d) None of these
Question 15. Which of the following is included in money cost ?
(a) Normal Profit
(b) Explicit Cost
(c) Implicit Cost
(d) All of these
Very Short :
QUESTION 1 Does Total Physical Product increase only when Marginal Physical Product increases?
QUESTION 2 What will be the marginal product when the total product is maximum?
QUESTION 3 How is Total Physical Product derived from Marginal Physical Product?
QUESTION 4 What do you mean by production?
QUESTION 5 Increase in Total Physical Product indicates that there are increasing returns to a factor.
QUESTION 6 Why Average Fixed Cost curve never touches “x” axis though lies very close to the x-axis?
QUESTION 7 When TVC is zero at zero levels of output, what happens to TFC or why TFC is not zero at zero level od output?
QUESTION 8 What is a change in quantity demanded?
Short Questions :
QUESTION 1 Evaluate the marginal product for the following.
QUESTION 2 Define cost concept. What are the different types of cost?
QUESTION 3 Explain the likely behaviour of total product under the stage of increasing return to
a factor with the help of numerical example.
QUESTION 4 With the help of example distinguish between total fixed cost and total variable
cost.
QUESTION 5 Draw average cost, average variable cost and marginal cost curves on a single
diagram and explain their relations.
QUESTION 6 Draw average cost, average variable cost and average fixed cost
curves on a single diagram and explain their relation.
QUESTION 7 Explain the relation between average revenue and marginal revenue when a firm can sell
an additional unit or a good by lowering the price.
QUESTION 8 Explain how do the following determine price elasticity of supply:
(i) Nature of the good (ii) Time period.
QUESTION 9 Define marginal revenue. State the relation between marginal revenue and average
revenue when a firm:
(i) is able to sell more quantity of output at the same price.
(ii) is able to sell more quantity of output only by lowering the price.
QUESTION 10 How do changes in MR affect TR?
Long Questions:
1. In the following table, identify the different phases of the law of variable proportions and explain
them with the help of the table and a diagram.
2. All the inputs used in production of a good are increased simultaneously and in the
same proportion. What are its possible effects on Total Product? Explain with
the help of a numerical example.
3. Explain the relation between Average Cost and Marginal Cost.
4. If price elasticity of supply of a commodity is 5. A producer supplies 500 units of this
product at a price of Rs. 5 per unit. How much quantity of this product will be
supplied, at the price of Rs. 6 per unit?
Assertion Reason Question:
1. Direction: In the following questions, a statement of Assertion (A) is followed by a statement of
Reason (R). Mark the correct choice as:
A. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
B. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
C. Assertion (A) is true, but Reason (R) is false.
D. Assertion (A) is false, but Reason (R) is true.
Assertion (A): Increasing returns to a factor is a short run phenomenon.
Reason (R): Greater application of the variable factor ensures fully utilization of the fixed factor.
2. Direction: In the following questions, a statement of Assertion (A) is followed by a statement
of Reason (R). Mark the correct choice as:
A. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
B. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
C. Assertion (A) is true, but Reason (R) is false.
D. Assertion (A) is false, but Reason (R) is true.
Assertion (A): Average product increases only when marginal product increases.
Reason (R): AP increases so long as MP is greater than AP, whether MP is rising or falling.
MCQ Answers :
1. Answer: (b) Factors of Production
2. Answer: (c) Both (a) and (b)
3. Answer: (b) Law of Variable Proportion
4. Answer: (c) Laws of Returns to Scale
5. Answer: (b) Second Stage
6. Answer: (a) Both MP and AP rise
7. Answer: (b) Long run
8. Answer: (b) Qx = f(A, B, C, D)
9. Answer: (c) Both (a) and (b)
10. Answer: (d) All of these
11. Answer: (d) All of these
12. Answer: (c) Short-run
13. Answer: (b) Labour
14. Answer: (d) All of these
15. Answer: (d) All of these
Very Short Answers :
1. Answer: No, because Total Physical Product increases Marginal Physical Product decreases but remains positive.
2. Answer: Marginal Product will be zero when the total product is maximum.
3. Answer: Cumulative addition
4. Answer: Production is the method of producing or developing goods or services in large quantities
with the help of various materials.
5. Answer: No, the total physical product also rises when the returns to a factor decrease.
6. Answer: The Average Fixed Cost curve never touches “x” axis though lies very close to the x-axis because Total
Fixed Cost can never be zero.
7. Answer: When TVC is zero at zero levels of output, what happens to TFC or why TFC is not zero at zero
levels of output because the fixed cost is to be acquired even at zero levels of output.
8. Answer: It is a change along a demand curve. The change is due to a change in price and quantity of a
commodity. The two types of change in quantity demand are Extension in demand and Contraction in demand.
Short Answers:
1. Ans.
2. Ans. The spending experienced on different inputs is known as the cost.
Types of cost:-
Money Cost- Total money spent by a company for manufacturing goods.
Explicit Cost & Implicit Cost- Payment made to an outsider are explicit and cost of self-supplied inputs are implicit cost.
Real Cost- All hard work, discomforts, sacrifices involved in manufacturing a product is called real cost.
Opportunity Cost- This the cost for the next best alternative foregone.
Short Run Cost- Fixed cost- Fixed factors cost
Variable Cost– Variable factor cost
3. Ans. Increasing return to a factor is the first phase of the Law of return to a factor. When
more and more units of a variable factor is combined with fixed factor up to a certain
level total physical product increases with increasing rate.
4. Ans.
5. Ans.
Relation of AC, AVC and MC
1. MC interects to AC and AVC at their minimum level
2. AC and AVC decreases before the interection by MC, but remain greater than MC.
3. AC and AVC starts to increase after the itersection by MC, and becomes less than MC.
4. As output increases, AC and AVC tends to be closer but the difference between AC and AVC can never be zero.
6. Ans.
1. AC is the vertical summation of AVC and AFC
2. The difference between AC and AVC falls as output increases but the difference of AC and AFC increases.
3. As output increases AC and AVC tends to be closer but their curves do not interect each other
because AFC always remains more than zero.
7. Ans.
1. AR and MR both decreases.
2. MR decrease at the rate of twice than AR.
3. MR become zero and negative but AR can never be zero.
8. Ans.
1. Nature of Commodity - Elasticity of industrial goods is more than that of agricultural
goods. Similarly supply of durable goods e.g. table is more elastic than that of
perishable goods e.g. vegetables.
2. Time Period- Generally elasticity of supply is more in the long period than in shorter
period of time. The reason is that in the long period, all adjustments to the changed
price can be made easily and supply of commodity can be varied accordingly
9. Ans. Marginal revenue is the addition to total revenue from producing one more unit of
output.
1. MR = AR at all levels of the output. (In case of perfect competitive market)
2. MR will be less than AR at all levels of the output. (In case of monopoly and
monopolistic market)
10. Ans.
1. If MR increases, TR increases at increasing rate.
2. If MR is constant, TR increases at constant rate.
3. If MR falls, TR increases at diminishing rate.
Long Answers:
1. Ans. Law of Variable Proportion states that if we go on using more and more units of a variable factor
along with a fixed factor, the total output initially increases at an increasing rate, after that it increases at
diminishing rate and finally it declines. It can be explained through the following three stages:
Stage 1:
• TPP increases at an increasing rate.
•MP increases and reaches at its maximum at the end of the stage.
• This is also called stage of increasing returns.
Stage 2:
• TPP increase but at diminishing rate.
• MPP starts decline but remains positive.
• This stage comes to an end when TPP is maximum and MPP is zero.
Stage 3:
• TP starts decline.
• MP becomes negative.
• This is also called stage of decreasing/negative returns.
2. Ans. The behaviour of total output in the long run time period is technically termed as
Returns to Scale.
There are three possibilities:
1. Increasing Returns to Scale (IRS):- It occurs when a given proportionate increase in all
factor inputs (in some constant ratio) causes proportionately greater increase in
output.
For example: Suppose there are only two inputs, labour (L) and Capital (K). Suppose
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1K + IL produce 100 units and 2K + 2Lproduce 250 units. Input rises by 100% while
the output rises by 150%.
2. Constant Returns to Scale (CRS):- It occurs when a given proportionate increase in all
factor inputs causes proportionately equal increase in output. At this stage, economies
of scale are counter balanced by diseconomies of scale. For example, suppose 1K+1L
produce 100 units and 2K+2L produce 200 units, both inputs and TP rise in the same
proportion.
3. Diminishing Returns to Scale (DRS):- It occurs when a given proportionate increase in
all factor inputs causes proportionately lesser increase in output.
For example, Suppose 1K+1L produce 100 units and 2K+2L produce 190 units, inputs
rise by 100% while the output rise by 90%
3. Answer: The relation between Average Cost and Marginal Cost
• When Average Cost decreases, Marginal Cost declines faster than the Average Cost. So, that
Marginal Cost curveremains lower than the Average Cost curve. This means Average
Cost > Marginal Cost.
• When Average Cost increases, Marginal Cost rises faster than the Average Cost. So, that MC
curve is above the Average Cost curve
• Marginal Cost curve intersects Average Cost curve from its lowest point. When the average
curve is minimum then Marginal Cost=Average Cost.
4. Ans. es = 5
Assertion Reason Answer:
1. B. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
2. C. Assertion (A) is true, but Reason (R) is false.