# NCERT Solutions for Class 12 Economics Chapter 3: Production and Costs

Hello Students. Are you Searching for NCERT Solutions for Class 12 Economics Chapter 3? If yes then you are most welcome to NCERTian. Here we have provided you with the complete Question and Answers of Chapter 3: Production and Costs, from Micro Economics textbook. These solutions are written by expert teachers and faculties keeping the need of students in mind.

The NCERT Solutions for Class 12 Economics cover all the questions pertaining to the subject in a very clear and lucid manner. Apart from being highly accurate, these solutions are also very easy to memorize. These solutions are written as per the latest CBSE syllabus and are helpful in clearing doubts. On this solution page, we have provided you with complete overview of the concepts and methods covered in the Chapter 3 of Micro Economics – Production and Costs.

## NCERT Solutions for Class 12 Economics Chapter 3

### Production and Costs Solutions

#### Q1) Explain the concept of a production function.

Answer) Production function, in economics, is a comparison that expresses the connection between the numbers of productive influences (such as labour and capital) used and the amount of product attained. The production function is written as:

Qx = f (L, K)
Where Qx = Total Physical Output
L= Total physical labour employed
K= Total capital employed

#### Q2) What is the total product of input?

Answer) It refers to total volume of goods and services that are produced in a firm with the provided input during a specific time period.

#### Q3) What is the average product of an input?

Answer) Average product is definite as the output per unit of factor inputs or the average of the total product per unit of input and can be considered by dividing the Total Product by the inputs (variable factors). Algebraically, it is explained as the ratio of the total product by units of labour employed to construct the output.

#### Q4) What is the marginal product of an input?

Answer) The marginal product of an input is the improvement in output that is achieved by using an additional unit of an input.

#### Q5) Explain the relationship between the marginal products and the total product of an input.

Answer) This can be explained with the help of law of variable proportions. As per this law when only one variable factor input is allowed to increase with all other inputs kept constant, these changes are observed:

1. With increase in Marginal Product (MP), there is a corresponding increase in Total Product (TP). A convex curve is obtained with the effect till the MP curve is at its maximum.
2. When MP declines but is positive, then TP increases with a decline in rate, giving total product a concave shape.
3. When MP is at zero, the TP is at maximum
4. When MP becomes negative TP falls.

#### Q6) Explain the concepts of the short run and the long run.

Answer) The long-run is a period of time in which the producer can change all the variables involved in the production like building, machine etc. The short-run is a period of time in which the producer can only make limited changes in the production process. It is the period in which at least one factor of production is fixed while others can be changed or improved. The examples of short run can be farmer having a fixed piece of land.

#### Q7) What is the law of diminishing marginal product?

Answer) According to this law, if the units of the variable factor keep on increasing keeping the level of the fixed factor constant, then initially the marginal product will rise but finally, a point will get to after which the marginal product of the variable factor will start falling. After this point, the marginal product of any additional variable factor will be zero, and can even be negative.

#### Q8) What is the law of variable proportions?

Answer) According to the law of variable proportions, if more and more units of the variable factor (labour) are combined with the same quantity of the fixed factor (capital), then initially the total product will increase but gradually after a point, the total product will start diminishing. Thus Law of variable proportions is the new name of the “Law of Diminishing Returns” of classical economics. Some economists also call it the Law of Non-Proportional Returns.

#### Q9) When does a production function satisfy constant returns to scale?

Answer) Constant returns to scale is achieved when the change in the factors of production matches with the changes in the total output. This means that the efforts of the producer to improve the production are yielding appropriate and equivalent returns.

#### Q10) When does a production function satisfy increasing returns to scale?

Answer) Increasing returns to scale is achieved when the change in the factors of production yields more than the proportionate changes in the total output. This means that the company has improved its productivity.

#### Q11) When does a production function satisfy decreasing returns to scale?

Answer) Decreasing returns to scale mainly occurs when increasing inputs lead to a proportionally smaller increase in output. For example, if both labour and capital are increased by ‘n’ times but the effect increase in output is less than ‘n’ times, then we say that the construction function exhibits DRS.

#### Q12) Briefly explain the concept of the cost function.

Answer) Cost function refers to the functional relationship between cost and output. It studies the behaviour of cost at different levels of output when technology is assumed to be constant. It can be expressed as below:

C= f(Q)
(Here, C= Cost of production; and Q= Quantum of output).

#### Q13) What are the total fixed cost, total variable cost and total cost of a firm? How are they related?

A fixed cost is a cost that does not change in relation to the total number of goods and services produced by the company. On the other hand, a variable cost is a cost that changes in relation to the total number of goods and services produced by the company.

• Total Fixed Cost: The cost incurred by a company in acquiring fixed production factors like buildings, cost of machinery and depreciation.
• Total Variable Cost: Cost incurred by a company on variable production factors like wages, fuel charges.
• Total Cost: The total cost of the firm is the total fixed cost and total variable cost put together. It is the actual cost incurred by the company when producing a given amount of output.

#### Q14) What are the average fixed cost, average variable cost and average cost of a firm? How are they related?

Answer) Average fixed cost (AFC) refers to the per unit fixed cost of production. Average variabe cost (AVC) refers to the per unit variable cost of production. Average cost (AC) refers to the per unit total cost of production. AC is the sum total of AFC and AVC.

Important Observation: AC, AVC and AFC

• AC curve will always lie above the AVC curve because AC, at all levels of output includes both AVC and AFC.
• AVC reaches its minimum point at a level of output lower than that of AC because when AVC is at its minimum point, AC is still falling because of falling AFC.
• As the output increases, the gap between AC and AVC curves decreases, but, they never intersect each other. It happens because the vertical distance between them is AFC , which can never be zero.

#### Q15) Can there be some fixed cost in the long run? If not, why?

Answer) The fixed cost cannot be set in the long run. Fixed costs can only be set for the short-run. Since all factors of production and inputs can change in the long run, a fixed cost cannot be determined for the output.

#### Q16) What does the average fixed cost curve look like? Why does it look so?

Answer) No, there cannot be any fixed cost in the long run. In the long run, a firm has enough time to modify the factor ratio and can change the scale of production. There is no fixed factor as the firm can change the quantity of all the factors of production and therefore there cannot be any fixed cost in the long run.

Fixed costs are not permanently fixed; they will change over time but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, such as warehouse costs and the like that are fixed only over the time period of the lease.

#### Q17) What do the short-run marginal cost, average variable cost and short-run average cost curves look like?

Answer) Average fixed cost curve looks like a rectangular hyperbola. It is defined as the ratio of TFC to output. We know that TFC remains constant throughout all the output levels and as output increases, with TFC being constant, AFC decreases.

#### Q18) Why does the SMC curve cut the AVC curve at the minimum point of the AVC curve?

Answer) It can be explained by following points:

1. When AVC (Average Variable Cost) falls, SMC (Short Marginal Curve) is lesser than AVC.
2. When AVC rises, SMC becomes more than AVC
3. When AVC is constant and is minimum, SMC is equal to AVC.

Therefore, SMC curve cuts the AVC curve at the minimum point.

#### Q19) At which point does the SMC curve intersect SAC curve? Give reason in support of your answer.

Answer) The SMC curve always intersects the AVC curve at its minimum point. This is because to the left of the minimum point of AVC, SMC is below AVC. SMC and AVC both fall but the former falls at a faster rate. At the minimum point K, AVC is equal to SMC. Beyond K, AVC and SMC both rise but the latter rises at a faster rate than the former and also SMC lies above AVC. Therefore, the only point where SMC and AVC are equal is where SMC intersects AVC, i.e., at the minimum point of the AVC curve.

#### Q20) Why is the short run marginal cost curve ‘U’-shaped?

Answer) The SMC curve is a U-shaped curve due to the law of variable proportions or law diminishing returns. In order to understand the reason behind the U-shape of SMC, let us divide the SMC curve (UAB) into three different parts according to the law of variable proportions:

1. UA part corresponds to increasing returns to factor.
2. Minimum point A corresponds to constant returns to factor.
3. AB part corresponds to decreasing returns to factor.

#### Q21) What do the long run marginal cost and the average cost curves look like?

Answer) The long-run marginal cost (LMC) and long-run average cost (LAC) are U shaped curves. The reason behind them being U-shaped is due to the law of returns to scale. It is argued that a firm generally experiences IRS during the initial period of production followed by CRS, and lastly by DRS. Consequently, both LAC and LMC are U-shaped curves. Due to the IRS, as the output increases, LAC falls due to economies of scale. Then falling LAC experiences CRS at the Q1 level of output which is also called the optimum capacity. Beyond the Q1 level of output, the firm experiences diseconomies of scale and if the firm continues to produce beyond the Q1 level, the cost of production will rise.

#### Q22)

The following table gives the total product schedule of labour. Find the corresponding average product and marginal product schedules of labour.

#### Q23)

The following table gives the average product schedule of labour. Find the total product and marginal product schedules. It is given that the total product is zero at zero level of labour employment.

#### Q24)

The following table gives the marginal product schedule of labour. It is also given that total product of labour is zero at zero level of employment. Calculate the total and average product schedules of labour.

#### Q25)

The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm?
Calculate the TVC, AFC, AVC, SAC and SMC schedules of the firm.

#### Q26)

The following table gives the total cost schedule of a firm. It is also given that the average fixed cost at 4 units of output is Rs 5/-. Find the TVC, TFC, AVC, AFC, SAC and SMC schedules of the firm for the corresponding values of output.

#### Q27)

A firm’s SMC schedule is shown in the following table. The total fixed cost of the firm is Rs 100. Find the TVC, TC, AVC and SAC schedules of the firm.

#### Q28)

Let the production function of a firm be Q=5L^1/2K^1/2
Find out the maximum possible output that the firm can produce with 100 units of L and 100 units of K.

#### Q29)

Let the production function of a firm be Q = 2L^2 K^2.

Find out the maximum possible output that the firm can produce with 5 units of L and 2 units of K. What is the maximum possible output that the firm can produce with zero unit of L and 10 units of K?