AHSEC Class 12 : ECONOMIC Chapter 3 - Production and Cost Notes for 2023 Exam | HS 2nd Year Economic Notes

AHSEC CLASS 12 ECONOMIC 

Part-A

Chapter:3

Production and Cost

Model Questions of last 10 years

1.Total cost (TC)=........... + Total variable cost (TVC) 1[2012]

2.If the total product with 5 units of a variable factor is 56. Calculate the average product. If the variable factor is increased by one unit as a result of which the total product becomes 57, what will be the marginal product?3(2012)

3.Explain the relationship between average product and marginal product with the help of diagram. 4 [2012]

4.The production function of a firm is given as Q = 2  L1/2, K1/2. Calculate the level of output when it. employs 25 units of labour (L) and 16 units of capital (K).4[2012,13,16,18]

5.The short run total cost (TC) function of a production unit is given below. Find out the total variable cost (TVC), average fixed cost (AFC), average variable cost (AVC) and average cost (AC) schedule. 6 [2012]

6.Show diagrammetically that total cost is the vertical addition of total fixed cost and total variable cost. 6[2012,13]

7. Define average variable cost.1[2013]

8. What does vertical supply curve indicate? 1[2013]

9.What is shut down point of a firm? 2[2013,15]

10. What is isoquant curve? Explain diagrammetically. 4 [2013]

11. Show that average fixed cost curve is a rectangular hyperbola. 4 [2013,16,18]

12. Give an example of fixed cost.1 (2014)

13. Distinguish between short run and long run. 2[2014]

14. State any two reasons behind the working of the law of diminishing marginal product. 2 [2014] 

15. The total cost (TC) schedule of a particular unit is given below. Find out the average cost (AC) and marginal cost (MC) schedules for the production units.

16. Show the relationship between average cost (AC) and marginal cost (MC).with the help of a diagram. 4 [2014,17]

17. Total fixed cost of a firm is 100 when it produce 15 units of output. If the level of output increases to 30 units. What will be the fixed cost in the short run?Give reasons to your answer.  2 [2015]

18. State the law of diminishing returns. State the reason behind this law.4 (2015)

19. Explain the relationship between marginal product (MP) and total product (TP) of an input. 4 [2015]

20. Distinguish between explicit cost and implicit cost. Give one example of each of them. 4 (2015,17)

21. Fill in the blank : 1(2016)

AC= AVC+............

22. Give one example of variable cost.1 [2016]

23. If the total product with 5 units of a variable factor is 55. Calculate the average product of it. If the factor is increased by 1 more unit as a result of which the total product becomes 60. What will be the marginal product? 4 [2016]

24. What is meant by Returns to scale? Explain the various returns to scale.4[2016]

 25. Distinguish between Returns to factor and returns to scale. 4 [2016]

26. What happens to total product when marginal product is zero? 1 [2017]

27. Why is average total cost (ATC) greater than average variable cost (AVC)?1 [2017]

 28. Define the term 'long run' as used in production? 2 [2017]

29. State any two assumptions of the law of variable proportions. 2 [2017] 

30. Is there any fixed cost in the long run? Put argument in support of your answer. 2[2018]

31. The total cost (TC) schedule of a firm is given below. Calculate TFC, TVC, AFC, AVC, AC and MC schedule. 6 [2018]

Model Questions Answers of 1 mark

1. Total Cost (TC)=..........+ Total variable cost (TVC) [2012]

Ans. TFC.

2. Define average variable cost. [2013]

Ans. Average variable cost is the variable cost per unit.

3. What does vertical supply curve indicate? [2013]

Ans. Perfectly inelastic supply.

4. Give an example of fixed cost.[2014]

Ans. Wages paisd to permanent workers. 

5. Fill in the blank : [2016]

AC= AVC+.........

Ans. AFC.

6. Give one example of variable cost.[2016]

Ans. Cost of raw materials.

7. What happens to total product when marginal product is zero? [2017]

Ans. Maximum.

8. Why is average total cost (ATC) greater than average variable cost (AVC)? [2017]

Ans. Because average fixed cost include in average total cost.

9. What is average product?

Ans. Average product refers to output per unit of variable factor.

10. What is marginal product? 

Ans. Marginal product is the addition to total product when one more unit of variable factor is employed.

11. What is an isoquant?

Ans. An isoquant shows different combinations of two inputs which yield the same maximum level of output. 

12. What does the production function of a firm refer to?

Ans. Production function refers to the relationship between physical input and physical output. 

13. What does the cost function of a firm reveal?

Ans. Cost function reveals the functional relationship between cost and output.

14. What is production? 

Ans. Production is the process of creating various goods and services. 

15.What are the main division of cost in the short run? 

Ans. (1) Fixed costs. (2) Variable costs. 

16. What is average cost of production?

Ans. Average cost is the cost obtained by dividing total cost by total output produced.

17. What is Marginal cost? 

Ans. Marginal cost is the addition made to total cost when one more output is produced. 

18. What is average variable cost?

Ans. Average variable cost is obtained by dividing total variable cost by total output. 

19. What is average fixed cost?

Ans. Average fixed cost is obtained by dividing total fixed cost by total output.

20. Give an advantage of economies of scale.

Ans. Cheap credit facility. 

21. What is returns to a factor?

Ans. When a producer effects a change in production by keeping the quantity of other factors of production fixed is known returns to a factor.

22.What is returns to scale? 

Ans. When a proportional increase in all inputs results in a chang in output is called returns to scale.

23. What are the factors of production?

Ans. Land, Labour, Capital and organisation. 

24. What is the shape of average fixed cost curve?

Ans. Rectangular hyperbola.

25. What do the cost of long run known for? 

Ans. Variable costs.

Model Questions-Answers of 2 marks 

1.If the total product with 5 units of a variable factor is 56, calculate the average product. If the variable factor is increased by 1 unit as a result of which the total product becomes 57, what will be the marginal product? [2012]

Ans. TP = 56, Q=5 ,Q1=6

Therefor , AP=TP/Q 

                       =56/5

                       =11.2

Threfor,  MP=57-56/6-5

                     =1

2. What is shut down point of a firm? 

Ans. In the short run, shut down point is the minimum point of AVC where SMC cuts. In the long run, the minimum point of LRAC is the shut down point.

3. Distinguish between short run and long run. [2014] 

Ans. (1) In short run, the factors are divided into fixed factor and variable factors. But all factors are variable in the long run.

(2) Demand is more significant in the short run where supply is more significant in the long run. 

4.State any two reasons behind the working of the law of diminishing marginal product.

Ans. (a) Increase in variable factors after optimum capacity of the factors.

(b) Imperfect substitution between fixed factors and variable factors.

5.Total fixed cost of a firm is Rs. 100 when it produce 15 units of output. If the level of output increases to 30 units. What will be the fixed cost in the short run. Give reason for your answer.[2015]

Ans. Given TFC = 100

If output increases to 30 units, fixed cost remains the same, i.e, Rs.100. 

Because, fixed cost do not vary in the short period. 

6.Define the term 'long run' as used in the production.

Ans. Long run is a period of time within which all factors of production can be varied. 

7.State any two assumptions of the law of variable proportions. [2017]

Ans. (i) The law assumes short run.

(ii) Technology is constant.

8. Is there any fixed cost in the long run? Put argument in favour of your answer.[2018]

Ans. There is no fixed cost in the long run. Because, in the long run all factors are variable.

9. Point out any two points of differences between-fixed factor and variable factor.

Ans. (1) Fixed factors remains the same but variable factors changes with change in output.

(2) Fixed factors prevails only in the short run where as variable factors prevails both in the short run and in the long run.

10. State the law of diminishing marginal product. 

Ans. The law of diminishing marginal product states that when an additional units of a variable factor are applied (other factors remaining constant) the total product increase at a diminishing rate.

11. State the law of variable proportion.

Ans. Law of variable proportion states that when more and more units of a variable factor are employed keeping other factors constant, initially total product increases at an increasing rate, then increases at a decreasing rate and finally falls.

12. Write any two characteristics of isoquant curve.

Ans. (1) Isoquant curve slopes downward from left to the right. 

(2) Isoquant curve is convex to the point of origin. 

13. Write any two reasons for increasing returns to a factor.

Ans. (i)  Fixed factors become better and efficient in production. (ii) It is discount on price when a large quantity of raw materials etc. is purchased by a firm.

14. State any two points of differences between production (output) and factor (input).

Ans. (i) Inputs are the means of production. But output is the result of the services provided by inputs. 

(ii) Inputs are independent variable. But outputs are the dependent variable. 

15. Write any two limitations of the law of diminishing marginal product.

Ans. (i) The law assumes that technology is constant which is not realistic.

(ii) The law is related to the quantity produced not with the value of the production. 

16. Define the law of returns to scale.

Ans. Returns to scale refer to change in output when all factors or inputs are change proportionately 

17. Write the difference between law of variable proportion and law of returns to scale. 

Ans. Law of variable proportion implies the change in one factor keeping other factors constant.

      But law of returns to scale refer to change in output when all factor or inputs are change proportionaly.

18. What is elasticity of supply?

Ans. Elasticity of supply implies the proportionate change in quantity supplied due to proportionate change in price.

19. Write any two determinants of elasticity of supply.

Ans. (i) Time element.

(ii) Availability of alternative market.

20. Name two commodities having less elastic supply. 

Ans. Milk, Fish.

21. Mention any two uses of elasticity of supply. 

Ans. (i) Formulation of economic policy.

(ii) Formulation of Price policy.

Model Questions-Answers of 4 marks

1.Explain the relationship between average product and marginal product with the help of a diagram. [2012]

Ans. The relationship between marginal product (MP) and average product (AP) can be explained with the help of the diagram below___

(i) When MP > AP, AP rises

(ii) When MP = AP, AP is maximum

(iⅱ) When MP < AP AP falls.

2. The production function of a firm is given as Q = 2L½, K½ . Calculate the level of output when it employs 25 units of labour (L) and 16 units of capital (K).[2012,13,14,16,18].

Ans. Given, L = 25 units , K= 16 units

There for, Q= 2L½ X 16½

                    =2x25½ x16½

                    =2x5x4 = 40units

3. What is Isoeuant curve? Explain it diagramatically. [2013]

Ans. Isoquant curve is that curve which shows different combinations of two inputs which yield the same maximum possible level of output.

In the diagram, IQ is the isoquant curve which shows a particular level of output through Labour different combinations of various inputs, i.e, labour and capital.

4. Why does AFC curve look rectangular hyperbola? 

Ans. When output is very close to zero, AFC is large and as output moves towards infinity AFC moves towards zero.

In the diagram, AFC curve is a rectangular hyperbola.

6. Show the relationship between average cost (AC) and marginal cost (MC) with the help of a diagram. [2014,17]

Ans.

(i) Both average cost and marginal cost are obtained from total cost.

(ii) When average cost falls, marginal cost remains lower than average cost.

(iii) When average cost is rising, marginal cost remains above average cost.

(iv) At the minimum level of AC, MC = AC. It is show in the diagram.

7. State the law of diminishing returns. State the reasons behind this law.[2015]

Ans. The law of diminishing returns to a factor statres that when additional units of a variable factor are applied, the total product increases at a diminishing rate.

The reasons behind the law are

(i) Beyond optimum capacity, fixed factors becomes inadequate relative to the quantity of variable factor. 

(ii) Factor of production are imperfect substitutes for cach other. 

(iii) With continuous application of the variable factor, the ideal factor ratio disturbed.

8.Explain the relationship between marginal product (MP) and total product (TP) of an input. [2015]

Ans. 

(i) When TP rises at an increasing rate, MP rises.

(ii) When TP rises at a diminishing rate, MP falls but positive. 

(iii) When TP is maximum, MP is

(iv) When TP falls, MP becomes negative.

9. Distinguish between explicit cost and Implicit cost. Give one example of each of them. [2015,17]

Ans. Explicit costs are those costs which are actually incurred by the firms and provisions have to be made for such expenses. On the other hand, Implicit costs are such cost for which company doesnot pay any cash.

Examples:

Explicit cost: Cost of purchased units

Implicit cost: Reward for the entrepreneur's own land. 

10.If the total product with 5 units of a variable factor is 55, calculate the average product of it. If the factor is increased by 1 more unit as a result of which the total product becomes 60. What will be the marginal product? 10[2016]

Ans: Given,  Q = 5 and TP = 55

There for,  average product, AP= TP/Q

                   =55/5 =11

Also given that Q=6, TP=60

There for,  MP= TP6-TP5

                        =60-55 = 5

11. What is meant by Returns to scale? Explain the various returns to scale.

Ans. Returns to scale implies the changes in output because of the changes in all factors proportionately.

The various returns to scale are__

Increasing returns to scale refers to a stage when percentage increase in all factor inputs causes proportionately more increase in output. Constant returns to scale refers to the stage when percentage increase in all factor inputs causes equal proportionate increase in output. Decreasing returns to scale refers to the stage when increase in all factor input causes proportionately less increase in output.

12. Distinguish between returns to factor and returns to scale. [2016]

Ans. (i) In returns to factor only one factor is changed whereas all factors are changed in returns to scale.

(ii) Returns to factor operate in the short run but returns to scale operates in the long run.

(iii) In returns to factor level of output is changed but in returns to scale, scale of output changed. 

(iv) In returns to factor, factor proportion changes where as factor proportion remains the same in returns to scale. 

13. Explain the concept of short run and long run in the process of production.

Ans. Short run is defined as a time period which is less than the minimum required to bring the changes in fixed factors of production. The fixed factors remains fixed is called fixed input whereas the factor which can be changed is called variable factor. Long run refurns to the time period in which all factors of production can be changed. Output can be increased by making changes in the quantity of both fixed as well as variable factor inputs.

14. State the reasons behind the law of variable proportion.

Ans. (i) Efficient utilization of fixed factors results to increase the total product at an increasing rate.

(ii) Development of efficiency of the variable factors results in an increase in the total product, average product.

(iii) Indivisibility of fixed factors: Due to indivisibility of the fixed factors, total product increases at a decreasing rate after a certain point.

(iv) Law of diminishing returns operate because of the imperfect substitutability of the fixed and the variable factors.

(v) Law of negative returns operate because of the imperfect combination of fixed and variable factors. 

15. Draw a total product curve of a firm and explain it.

Ans. Total product is the sum total of the production of all units of the variable factor.

In the diagram, total product (TP) curve initially increases at an increasing rate, then diminishes after a particular stage and then falls while increase in the units of variable factor.

Model Questions Answers of 6 Mark  

1.The short run total cost (TC) function of a production unit is given below. Find out the total variable cost (TVC), average fixed cost (AFC), average variable cost (AVC) and average cost (AC) schedule. [2012]

Ans: 

2.Show that total cost (TC) is the vertical addition of total fixed cost (TFC) and total variable cost (TVC) with the help of a diagram. [2012,18]

Ans. Total cost = total fixed cost + total variable cost.

In the diagram, OX axis shows quantity produced and OY axis shows the cost. When the firm produce OQ level of output, total cost is QL where total fixed cost is QM and total variable cost is QN. Here QL = QM + ON (=ML).

Likewise, at OQ, level of output total fixed cost is Q, M and total variable cost isQ, N The total cost, Q1,  L1= 0 , M + Q , N, (L 1 N 1 )

Thus, it is proved that total cost is the vertical addition of total fixed cost and total variable cost.

3.The total cost schedule of a firm is given below. Find out the TFC, TVC, AFC, AVC, AC and MC schedule. [2018]

Ans :

4.The production function of a production unit is given as Q = 2L + 3K where K = capital and L= labour

(i) Find out the maximum level of output, when L =5 and K = 10

(ii) Find out the maximum level of output, when L = 6 and K = 0 .

Ans. (i) Q = 2L + 3K

When L = 5 and K = 10

There for, Q = 2L + 3K

=2*5+3*10

= 10 + 30

=40 units

(ii) Again L = 6 and K = 0

Therefor, 2x6 + 3x0

= 12 units

5. The total product schedule of a firm is given below:

Labour: 0 1 2 3 4 5 6 

Total Product :20 45 65 80 90 90

Calculate the marginal product and average product of the firm.

Ans. 

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