Question

a) Distinguish between the Law Variable Proportions and the returns to scale. Explain the three types of returns to scale with graphs and example. Which one is most desirable for a firm and why? Explain with 3 examples from Bangladesh.

b) Describe the concept of Fixed cost and variable cost. Provide at least 5 examples of each. You are given a total cost function: C=200+100Q³+50Q²-80Q, find out VC, FC, AFC, AVC, MC, and AC when Q=10.

Answer 1

The Law of Variable Proportions or Return to a Factor plays an important part in the study of Production Theory. In this article, we will examine the meaning, explanation, stages, significance, and reasons behind the Law of Variable Proportions operation.

Returns to scale, on the other hand, is a definition of a long time when output can be increased by increasing the output rate. That returns, constant returns and rising returns continue to work as the production scale is extended, even though all of the variables are variable factors.

there are three types of return of scale

1. increasing return to scale

Increasing scale returns or decreasing costs refer to a situation where all production factors are increased, where output increases at a higher rate. It means that if all inputs are duplicated, output will also increase at a faster than double rate. Hence, it is said that the returns to scale are rising. This rise is due to many factors, such as the separation of economies of scale from outside.

2. constant return to scale

Constant return to scale or constant cost refers to the situation of production in which output increases exactly the same proportion in which production factors are increased. When input variables are duplicated output is often multiplied in simple terms. Internal and external economies in this situation are almost the same as internal and external disease economies. This situation occurs when economies of scale are balanced by diseconomies of scale after attaining a certain level of output. This is called homogeneous function of production. A good example of this form is the Cobb-Douglas linear homogenous production function. We see that the increase in production factors , i.e. labor and capital, is equal to the proportion of the increase in output. that is the constant return to scale.

3.. decreasing return to scale

Decreasing returns or rising costs refer to that situation of production where, if all the production factors are increased in a given proportion, output increases in a smaller proportion. If inputs are doubled, that means output will be less than doubled. If 20% increase in labor and capital is accompanied by 10% increase in production, this is an example of reduced returns on labor and capital. The key cause of rising returns to scale activity is that domestic and foreign economies are smaller than internal and external disease economies.

firm is prefered constant return to scale because if we increase input we get doubled output for example The manufacturing sector maintains productivity growth, growing scale returns and rapid technological change (Weiss, 1988). The bakery company is one of the manufacturing companies in Bangladesh. It plays a dominant role in enhancing economic development, especially in the case of job creation, income generation and the distribution of necessity food (Rais et al., 2013). Arrow et al. (1961) state that the production function of Cobb-Douglas in any empirical work is the most widely used production function. Murthy (2002) criticises the role of development of Cobb-Douglas. He states that a large number of inputs can't handle the function. This function assumes constant return to scale and is based on constraints of perfect competition in the factor and product market.

b.)

The distinction in categorizing business costs as either continuous or fluctuating when there is a shift in operation and volume of sales is fixed cost vs variable cost. Fixed costs are expenditures that remain constant for a period of time irrespective of the amount of sales, such as rent , salaries and loan payments, Whereas variable costs are expenditures that respond directly and proportionally to changes in the level or amount of business operation, such as direct labor, taxes and operating expenses.

now we see the example of fixed cost

1. Rent
2. Telephone and internet costs
3. Insurance
4. Employee Salaries
5. Loan Payments

there are examples of variabble cost

1. Direct labor
2. Commissions
3. Taxes
4. Operational expenses
5. utility cost

b.)