Question

11) What is a fixed cost?

12) What is a variable cost?

13) Where does the marginal cost curve intersect the average total cost curve?

14) What will be the impact on the total product of labor curve of an improvement in technology?

15) According to the Law of Diminishing Returns, what happens to total output as more of a variable input is used with fixed resources?

Answer 1

Answer 11- Fixed cost is the cost which does not vary with the level of output in the short run. In other words, when production or sales in the business increases fixed cost does not increase and when the production or sales in the business decreases the fixed cost does not decrease. Examples of fixed costs are rents of premises, transportation costs, machinery, buildings, equipments, depreciation cost, insurance premium, maintenance allowances etc. Even when production is zero, fixed cost is present. Fixed cost can be recovered by selling the business after complete shut down. The fixed cost curve in a graph is a horizontal line parallel to the x-axis as it is a constant amount throughout the business period.

Answer 12- Expenses which vary with production or sales in a business is called vatriable cost. In other words, a rise in sales or production increases variable cost and a fall in sales volume or production decreases variable cost. Examples of variable costs include indirect costs such as raw materials cost and direct costs such as labour costs. For example, the packaging cost of a company is a variable cost, as more and more products are being produced, the packaging cost increases and vice-versa. The variable cost curve slopes upwards from left to right, starting from zero.

Fixed cost (FC) and variable cost (VC) make up to total cost (TC), i.e., TC=FC+VC

Answer 13-The Marginal Cost (MC) curve intersects the average total cost curve (ATC) curve at the lowest point of ATC. This it because the MC of producing the next unit will always affect the ATC. As a result, as long as MC is less than the ATC, ATC will fall. For ATC to rise, MC must be greater than ATC. Eventually, after the minimum point of ATC, the MC of producing another unit will be greater than the ATC and the ATC will rise.

Answer 14-The Total product of labour (TP) curve represents the total amount of output that a firm can produce with the given amount of labor inputs. The TP changes with change in labor. The TP curved is S-shaped. An improvement in technology increases the output we get from a given amount of labor. With improvement in technology, efficiency of labour increases and the cost of production decreases, hence more output is produced and the Total product of labor increases i.e. rises upwards.

Answer 15-According to the law of diminishing returns , as more and more of a variable input is used keeping the other inputs fixed, first ouput will increase, but, after a point of time it will start decreasing. For example, suppose a vegetable farmer has already decided how much seed, water, fertilizer and labor he will use in this season. But, he has not decided how much fertilizer to use. As he increases the amount of fertilizer keeping other inputs same, initially vegetable production rises. But, after a point of time output starts to decrease as too much fertilizer is poisonous for the vegetables.