Question

3.1. Explain the difference between the short-run and the long-run production function. Cite one example of this difference in a business situation. (6)

3.2. Explain the relationship between the law of diminishing returns and the three stages of production using a graph showing total, marginal and average product. (10)

Answer 1

AS per policy we have to answer first question.

Answer-1) In the production function short run refers to a period of time wherein at least one input in process of production will be fixed; and on contrast in the long run all factors of production will be variable. In the short run the costs will have fixed factors as well as variables that impact production as the time span is so short that the business cannot raise its output; and consequently the price in short term will be determined by its demand. On the other hand as there are no fixed factors of production in the long run thus firm can raise its output as per the expected conditions. Law of variable proportion will be applicable in short run and law of returns will be applicable in the long run.

For example: In agricultural business a firm has 6 acres of land and 20 units of labour. The firm initially on the land (fixed factor) utilizes only one labor unit of labour (variable factor); thus land-labour ratio is 6:1. Now if business increases the labor and employ 2 units of labor the ratio will become 6:2 or 3:1; thus depicts the law of variable proportion. In the long run when all factors will be varied in the same proportion and the how output proportion changes when inputs are proportionately changed depicting the law of returns to scale.