Question

Complete the following short-run cost table using the information provided.

Q	TC	TFC	TVC	AVC	ATC	MC
0	$   4	$_____	$	$	$	$
1	7
2	9
3	10
4	11
5	13
6	17
7	22

3-      Using graphs, show the relationship between production and costs, by using marginal Product of labor (MPL), Average Product of labor (APL), Marginal cost (MC), and Average Cost (AC) curves?

4-      State the three cases of Returns to scale. Explain when each case could be realized

Answer 1

3. By the graph above we can see that there exists an inverse relationship between MPL and MC. this is because we can see in the diagram as MPL increases due to increased efficiency of workers due to specialisation, workers can more units efficiently while MC falls as cost of producing each additional units falls down due to efficiency. When the MPL reaches its maximum, MC reaches its minimum. Finally MPL starts falling because efficiency starts falling with each additional unit produced and MC starts rising as each additional can be produced at more and more cost due to marginally decreasing efficiency.

Therefore,

4.Three cases of returns to scale are :-

• INCREASING RETURNS TO SCALE: When output increases at a rate greater than the rate at which input have increased. Eg: 100% increase in inputs leads to 200% rise in output. This can be realised when there is division of labour, specialisation and other factors like volume discounts, lower interest on loans etc.
• CONSTANT RETURNS TO SCALE: When output increases at a rate equal to the rate of increase in inputs. Eg: 100% increase in inputs leads to 100% increase in output. This happens when factors leading to Increasing returns to factor in long run start to fall down or get reduced in impact by factors leading to Diminishing returns i.e., the firm is on the transitioning point from increasing returns to decreasing returns i.e., at its peak.
• DIMINISHING RETURNS TO SCALE: When output increases at a rate less than the rate at which inputs increase. Eg:100% increase in inputs leads to 66.67% increase in output. This happens when production units employs more labour or capital than what is required resulting in lack of coordination, lack of availibility of resources and other problems like reduced efficiency and excess capacity which remains idle.