Download UNIT 3 (18 MARKS) PRODUCER BEHAVIOUR AND SUPPLY

UNIT 3 (18 MARKS)
PRODUCER BEHAVIOUR AND SUPPLY
PRODUCTION FUNCTION AND
RETURNS TO A FACTOR
Q1. What is a production function?
1
Ans. Production function is the relationship between physical input and physical output.
Q2. Define total product?
1
Ans. It is sum total of output produced by all units of labour.
TP=AP*L
Q3. Define marginal product?
1
Ans. Marginal product is the change in total product as a result of a unit change in the input
of a variable factor.
MPorMPP=TPn -TPn-1
Q4.what is meant by average product ?
1
Ans. It is production divided by units of the variable factor.
AP=TP/L
Q5. What are the fixed factors of production?
1
Ans. Fixed factors of production are those factors of production the application of which
does not change with the change in output.
Q6. What are the variable factors of production?
1
Ans. Variable factors of production are those factors of production the applications of which
changes with the change in output.
Q7. Explain the relationship between marginal product and total product?
Ans. (i) when MP increases, TP increases at increasing rate.
(ii) When MP constant, TP increases at constant rate.
(iii) when MP decreases, TP increases at diminishing rate.
Q8. Complete the following table:
Units of labour
1
2
3
4
5
6
7
Ans.
TP
40
80
110
130
140
140
130
AP
3
3
MP
Units of labour
TP
AP=TP/units
MP=TPnof labour
TPn-1
1
40
40
40
2
80
40
40
3
110
36.66
30
4
130
32.5
20
5
140
28
10
6
140
23.33
0
7
130
18.57
-10
Q9. Identify different stages of production and state the related law?
4
Units of labour: 1
2
3
4
5
6
7
8
Units of output: 2
6
12
16
18
18
14
8
Ans.
Units of labour Units of output MP
stages
1
2
2
phase/stage I : increasing returns
2
6
4
3
12
6
4
phase/stage II : diminishing returns
4
16
2
5
18
0
6
18
-4
phase/stage III : negative returns
7
14
-6
8
8
Q10. What are the causes of increasing returns to a factor?
3
ANS. Causes of increasing returns to a factor :
1. Fuller utilization of the fixed factor : in the initial
Stages fixed factor remains under utilized. Its fuller utilization cause for greater
application of the variable factor. Hence initially additional units of the
variable factor add more & more to total output .
2. Increased efficiency of the variable factor : Additional
Application of the variable factor causes process based division of labour
That raises efficiency of the factor. Accordingly MP of the factor tends to
Rise.
Q11. What are the causes of decreasing returns to a factor?
3
Causes of decreasing return to a factor :
Fixity of the factor: as more & more units the variable factor continue to be
combined with the fixed factor , the latter gets over utilized. Hence the diminishing
returns.
2. Imperfect factor substitutability: factors of production are
imperfect substitutes of each other. more & more of labour cannot
be continuously used in place of additional capital.
Q12. What is the law of variable proportion?
Explain with the help of TP, MP & AP
Schedule & curves.
6
Ans. Law of variable proportion: it states that as more and more of the variable factor is
Combined with the fixed factor a stage will come when MP of variable factor starts
declining.
SCHEDULE
labour
TP
2
2
2
5
3
9
4
12
5
14
6
15
7
15
8
14
Land
1
1
1
1
1
1
1
1
AP
2
2.5
3
3
2.8
2.5
2.1
1.7
MP
2
3
4
3
2
1
0
-1
Increasing returns to
a factor
Decreasing returns to
a factor
Negative
returns
T
y
TP
Total
products
K
o
L
Increasing returns
y
E
S
Diminishing returns
X
Marginal
products
X
o
L
S
MP
-ve
UNITS OF THE VARIABLE FACTOR
FORMULAS
1. TP = AP*Q
2.
3.
&
MP = TPn – TPn -1
AP = TP/
HOTS
Q1. Define short run and long run. How is production function specified for the two periods?
Q2. What is the relevance of stages or phases of production?
Q3. Why is TP (total product) maximum when marginal product (MP) is zero?
CONCEPTS OF REVENUE
Q1. What is meant by revenue?
1
Ans. Revenue refers to money receipts of a firm from the sale of its output.
Q2. Define total revenue?
1
Ans. Total revenue is the sum total of revenue derived from the sale of all units of the
commodity.
TR=∑ MR
Q3. What is meant by average revenue?
1
Ans. Average revenue is the revenue per unit of output sold.
AR=TR/Q
Q4. Define marginal revenue?
1
Ans. Marginal revenue is the change in total revenue as a result of selling one more unit of
output.
MRn=TRn-TRn-1
Q5. Which concept of revenue is called price?
1
Ans. Average revenue is called price.
Q6. What changes should take place in total revenue so that (i) marginal revenue is positive
and constant, and (ii) marginal revenue is falling?
3
Ans. (i) when MR is positive and constant, TR should increase at a constant rate
(ii) When MR is falling, TR should increase at a decreasing rate.
Q7. What change will take place in marginal revenue when:
3
(i)
Total revenue increase at increasing rate?
(ii) Total revenue increases at a diminishing rate?
Ans. (i) when total revenue increases at an increases rate, marginal revenue should be
increasing.
(ii) When total revenue increases at a diminishing rate, marginal revenue should be
diminishing.
Q8. What change in total revenue will result in:
3
(i)
a decrease in marginal revenue, and
(ii) An increase in marginal revenue?
Ans. (i) with a decrease in marginal revenue, total revenue should increase at diminishing
rate.
(ii) With an increase in marginal revenue, total revenue should increase at increasing rate.
Q9. Explain the relationship betweet TR, MR & AR with the help of data & diagram? 6
ANS.
Output
1
2
3
4
SCHEDULE
price
TR
10
10
9
18
8
24
7
28
MR
10
8
6
4
AR
10
9
8
7
5
6
7
Y
6
5
4
30
30
28
2
0
-2
6
5
4
Relationship between TR & MR
1. When TR is increasing at constant rate MR should be constant.
2. When TR is increases at decreasing rate MR should be decreasing.
3. When TR is decreasing MR is negative.
4. When TR is maximum MR is zero.
Relationship between MR & AR
1.
When AR is downward sloping, MR curve
should be below AR
curve.
2. If AR is constant MR is equal to AR.
TR
TR
0
Y
X
OUTPUT
MR
&
AR
AR
X
0
OUTPUT
MR
Q10. What are revenue curves under perfect competition, monopoly & monopolistic
competition, explain with the help of Schedule?
6
Ans.
1.
Schedule under perfect
OUTPUT
1
2
3
4
AR =P
competition:
TR
5
5
5
5
MR
5
10
15
20
FORMULAS


TR = AR * Q &
MR = TRn- TRn-1
TR= Total Revenue
MR= Marginal Revenue
5
5
5
5

AR = TR / Q
AR = Average Revenue
Revenue curves under perfect competition
Y
P= AR=MR
REVENUE(RS)PP
0
X
OUTPUT
2 . Revenue curves under monopoly:
Schedule
Output
TR (AR*Q)
AR (TR/Q)
1
10
10
2
18
9
3
24
8
4
28
7
MR(TRn-TRn-1)
10
8
6
4
y
REVENUE
(RS)
AR
MR
0
x
3.
OUTPUT
Revenue curves under monopolistic:
Schedule
Output
1
AR(TR/Q)
10
TR(AR*Q)
10
2
9.5
19
4
8.5
34
MR(TRn-TRn-1)_
10
3
8
7
y
Revenue(Rs)
AR
MR
X
0
Output
9
27
Q4: Complete the following table:
Output
Total
Marginal
(units)
revenue(Rs.)
Revenue(Rs.)
1
14
_
2
24
_
3
24
_
4
16
_
Ans.
Output(units)
1
2
3
4
Total
Revenue(Rs.)
14
24
24
16
Marginal
Revenue(Rs.)
14
10
0
-8
Q5.Complete the following table:
Price(Rs.)
Output(units)
Total
Revenue(Rs.)
7
_
7
_
2
10
_
3
_
1
_
_
Ans.
Price(Rs.)
7
5
3
1
Output(units)
1
2
3
4
Total
Revenue(Rs.)
7
10
9
4
4
Average
Revenue(Rs.)
_
_
_
_
Average
revenue(Rs.)
14
12
8
4
4
Marginal
Revenue(Rs.)
_
_
-1
-5
Marginal
Revenue(Rs.)
7
3
-1
-5
HOTS
Q1. Show that AR= price?
Q2. What is firms demand curve?
Q3. What is firm’s price line? What is its shape?
Q4. Why MR<AR for a monopoly firm?
CONCEPT OF COST
Q1. What is meant by cost of production?
1
Ans. Cost is the expenditure incurred by the producer on purchases of factor input such as land,
labour, capital, etc., and non-non factor inputs such as raw material,fuel,etc.
Q2. What is meant by total cost?
1
Ans. Total cost refers to all expenses incurred by the producer to produce a given quantity of
output.
Total Cost(TC)= Total Fixed Cost (TFC)+Total Variable Cost(TVC)
Q3. What is meant by average cost?
1
Ans. Average cost is the cost per unit of output producer.
AC=TC/Q
Also,
AC= AFC+AVC
Q4. Define marginal cost?
1
Ans. Marginal cost is the change in total cost by producing one more or less unit of output.
Also,
MCn=TCn-TCn-1
MC=ΔTC/ΔQ
Q5. Define fixed cost?
1
Ans. Fixed or supplementary costs are those costs which do not change with change in the
level of output.
Q6. What is meant by prime and variable cost?
1
Ans. Prime and variable costs are those costs which change as the level of output changes.
Q7. What is the general shape of AFC curve?
1
Ans. The shape of AFC curve is a rectangular hyperbola.
Q8. Differentiate between fixed and variable cost?
ANS.
VARIABLE COST
FIXED COST
Fixed cost is the Expenditure incurred
By the producer on the purchase of fixed
Factor.
fixed cost do not change with the quantity
output.
3
Variable cost is the expenditure incurred by
the producer on the use of variable factor.
of
Variable cost change with change With
quantity of output.
fixed cost remain the same whether output is
zero or maximum.
variable cost is zero when output is zero.
Rent, wages of permanent Staff.
Cost of raw material, wages of Casual labour.
Q9. Explain the relation between average cost & marginal cost with the help of diagram?
ANS.
Y
MC
AC
4
COST
P
0
E
Q
X
Q1
OUTPUT
Relation between average and marginal cost
 Both AC and MC are calculated from TC.
 When AC falls, MC is lower than AC.
 When AC rises, MC is greater then AC.
 MC cuts AC at its lowest point.
Q10.
Give meanings of:
3
 Explicit cost
 Implicit cost
Ans. EXPLICIT COST: Explicit costs are those cash payments which firms makes to outsider
for the purchase of goods and services. For e.g.: wages paid to laborers’ & price of raw materials.
IMPLICIT COST:
Implicit costs are opportunity cost of self-owned and self-employed
resources. For e.g.: interest on entrepreneur’s own capital or rent on Entrepreneur’s own building.
Q11. A firm’s total cost schedule is given in the following table:
Output(units): 0
1
2
3
4
5
6
7
8
Total cost (in 40 120 170 180 210 260 340 440 550
Rs.)
(1).what is the total fixed cost of this firm?
(2).drive AFC,AVC,ATC and MC schedules.
6
Ans.(1).since at zero level of output total cost is 40,this is the firm’s total fixed cost.
Output TC(Rs.) TFC(Rs.) TVC(Rs.) AFC(Rs.) AVC(Rs.) ATC(Rs.) MC(Rs.)
(units)
0
40
40
_
_
_
1
120
40
80
40
80
120
80
2
170
40
130
20
65
85
50
3
180
40
140
13.33
46.67
60
10
4
210
40
170
10
42.5
52.5
30
5
260
40
220
8
44
52
50
6
340
40
300
6.67
50
56.67
80
7
440
40
400
5.71
57.14
62.85
100
8
550
40
510
5
63.75
68.75
110
Q12. From the following table , calculate average variable cost of each given level
of output:
Output(units) 1
2
3
4
Marginal
70
60
62
72
cost (Rs.)
4
Ans.
Output(units) Marginal
cost (Rs.)
1
70
2
60
3
62
4
72
Total variable
cost (Rs.)
70
130
192
264
Q3. Complete the following table:
Output(units) Total
Average
variable
variable
cost(Rs.)
cost(Rs.)
1
_
12
2
20
_
_
_
10
4
40
_
Average variable
cost (Rs.)
70
65
64
66
4
Marginal
cost(Rs.)
_
_
10
_
Ans.
Output(units) Total
variable
cost(Rs.)
1
12
2
20
3
30
4
40
Average variable
cost(Rs.)
12
10
10
10
Marginal
cost(Rs.)
12
8
10
10
HOTS
Q1. During the market period all costs are fixed costs. How?
Q2. MC can be measured both as the difference between TCn and TCn-1 as well as the
difference between TVCn and TVCn-1. How?
Q3. Does TC always shoot from y-axis?
Q4. What segment of MC curve serves as short period supply curve of the firm and what as
long period supply curve?
Q5. Why long period average cost curve is for a firm is U shaped, when in the long run a
firm can combine different factors in the best possible ratio?
PRODUCER`S EQUILIBRIUM
Q1. Who is a producer?
1
Ans. A producer is a producing unit who uses factor inputs to produce goods which have
exchange value.
Q2. What is meant by producer’s equilibrium?
1
Ans. Producer is said to be in equilibrium when he maximizes his profits and minimizes his
loses. It occurs when (i) MR=MC and MC is rising.
Q3. Explain producer’s equilibrium with the help of TR-TC approach.
3
Ans. The producer’s equilibrium refers to the situation in which he maximizes his profits.
Profits = TR-TC
OUTPUT
TR
TC
PROFIT (TR-TC)
0
0
3
1
4
5
2
7
6
3
9
7
4
10
9
5
10
12
6
9
18
rd
Producer is in equilibrium at 3 level of output.
-3
-1
1
2
1
-2
-9
producer equilibrium
What are the conditions of producer equilibrium under perfect competition
During short run?
6
Ans.
Extra- normal profit
Q4.
TR>TC
TR/Q > TC/Q
AR >AC
Y
MC
AC
R
COST &
A
REVENUE B
AR=MR=P
E
NORMAL PROFITS
TR=TC
TR/Q=TC/Q 0
AR=AC
X
Y
AC
MC
COST &
REVENUE
P
AR=MR=P
X
0
OUTPUTS
C
EXTRA NORMAL LOSSES
TR<TC
TR/Q<TC/Q
AR<AC
AC
Y
MC
Q
T
COST &
S
MR=AR=P
REVENUE
0
M
X
OUTPUT
HOTS
Q1. Why should MC be rising at the point of equilibrium?
Q2. What happens if the firm increases its output even when MR=MC?
Q3. Differentiate between gross profit and net profit of a firm?
Q4. Why should a producer production activity even when he is just breaking-even, or when
TR=TC?
Q5. How are break-even price and MC related to each other in the context of long period
equilibrium? Consider a perfectly competitive market?
UNIT 1 (4 MARKS)
INTRODUCTION
Q1: What is Scarcity?
Ans. It is a situation when demand for a good exceeds its supply even at a zero price.
1
Q2: Define the term Economy?
1
Ans. Economy is a system spread over a particular area reveals the nature and level of economic activities in
that area. It shows how people of the concerned area earn their living.
Q3: what is the Production possibility Curve?
1
Ans: Production possibility curve shows different combinations of two goods which can be produced with the given
resources on the assumptions that (1).resources are fully and efficiently utilized, and (2). Technique of production
remains constant.
Q4: Define Opportunity cost?
Ans: Opportunity cost refers to value of a factor in its next best alternative use.
1
Q5: Explain the problem of “what to produce”.
4
Ans. It is the standard knowledge that resources are scarce in relation to human needs. We cannot produce
all goods as much as we wish to produce.
Allocation of resources and the consequent problem of choice require that we decide what to produce and
what not .we have to decide which wants are to be taken on priority and which ones can wait. It involves
two-fold decision:
(a).Firstly, the economy has to decide what goods and services are to be produced .for instance which of the
consumer goods like sugar, clothes, wheat, ghee etc, are to be produced and which of the capital goods like
machines, tractors etc, are to be produced. Similarly, choice has also to be made between the production of
war time goods like rifles, guns, tanks and peace time goods like bread or butter.
(b).When an economy has taken a decision as to what goods or services are to be produced, and then it has
to decide about its quantity. How much of consumer goods and how much of capital goods are to be
produced. For instance if an economy decides to produced more of cloth and wheat with in a given period
and with limited means, then it will have to produce less of machines.
Q6: Explain the problem “How to produce”?
3
Ans: This problem is concerned with the choice of technique of production. For example, production of
cloth is possible either by handlooms or by modern machines. This problem is concerned with the efficient
use of resources. It implies more production at less cost. Broadly these are two techniques of production:
(a) Labour intensive technique: Under this technique labour is used more than capital.
(b) Capital intensive technique: Under this technique, capital is used more than labour. An economy must
decide as to which technique is to be used in a given industry so that efficient product6ion is obtained.
Efficient technique of production is that which uses the least amount of scarce resources to provide the
same amount of output or in other words, the production would be undertaken at minimum cost. The
goods and services should be produced efficiently.
Q7. Explain the problem “For whom to produce “?
3
Ans. This is the problem of distribution of final goods and services, or briefly the problem of distribution of
production. Value of production in an economy is identical with the value of income. Thus, the problem of
distribution of production implies the problem of distribution of income. This problem has two aspects:
(a)
This first aspect relates to personal distribution .How should production be distributed among different
individuals and households of the society? It is also concerned with the problem of inequality in the distribution of
income.
(b)
The second relates to functional distribution .How should output be distributed among different factors of
production viz. land, labour, capital and entrepreneur as their reward for the act of production? It is not related to
the problem of inequality.
Q8: Why PPC (production possibility curve) slopes downward?
3
Ans: Production possibility curve slopes downward from left to right it are because in a situation of the fuller
utilization of the given resources, production of both the goods cannot be increased. More of goods –X can be
produced only with less of goods –Y.
GOOD Y
GOOD X
Q9: Why production possibility curve is concave to the point of origin?
Ans: It is because to produce each additional unit of good-x, more and more units of good-y will have to
be sacrificed than before. Opportunity cost of producing every additional unit of good X tends to increase
in terms of the loss of production of good Y.
HOTS
Q1. If resources are scarce, how do you explain massive unemployment in India?
Q2. If production possibility curve shift to the right, should it be parallel to the old one?
Q3. If PPC related to wheat and rice (on the x-axis and y-axis respectively) draw diagram showing change
in PPC when resources remain constant and technology improves only for wheat?