Class 12 Economics – Chapter 3

Production and Costs

1. Production

Production is the process of converting inputs (resources) into output (goods or services).

Examples

Farmer → Wheat
Tailor → Clothes
Factory → Cars
Teacher → Education services

2. Production Function

A production function shows the maximum output that can be produced using different combinations of inputs with the available technology.

Formula

Q = f(L, K)

Where:

Q = Output
L = Labour
K = Capital

Important Points

Shows the best possible production.
Based on a given level of technology.
Better technology increases production.

3. Factors of Production

Labour
Capital
Land
Entrepreneurship

For this chapter, only Labour (L) and Capital (K) are considered.

4. Short Run and Long Run

Short Run

At least one factor is fixed.
Only variable factors can be changed.
Usually, capital remains fixed while labour changes.

Long Run

All factors are variable.
No fixed factor exists.
Firm can change both labour and capital.

5. Isoquant

An Isoquant is a curve showing different combinations of labour and capital that produce the same level of output.

Features

Downward sloping
Convex to the origin
Higher isoquant means higher output
Isoquants never intersect

6. Total Product (TP)

Total Product is the total output produced by employing a given amount of the variable factor.

Formula

TP = Total Output

7. Average Product (AP)

Average Product means output produced per unit of labour.

Formula

AP = TP ÷ Labour

8. Marginal Product (MP)

Marginal Product is the extra output produced by employing one additional unit of labour.

Formula

MP = Change in TP ÷ Change in Labour

9. Relationship among TP, AP and MP

Total Product

Initially increases rapidly.
Later increases slowly.
Can eventually become constant or decline.

Marginal Product

First rises.
Reaches maximum.
Then falls.

Average Product

First rises.
Reaches maximum.
Then falls.

Important Relationship

MP > AP → AP rises.
MP = AP → AP is maximum.
MP < AP → AP falls.

10. Law of Variable Proportions (Law of Diminishing Marginal Product)

Statement

When more units of a variable factor are employed while other factors remain fixed, the marginal product first increases and then starts decreasing.

Reason

Initially, resources are used more efficiently. After a point, fixed resources become overcrowded, reducing efficiency.

Stages

Stage I

TP increases rapidly.
MP rises.
AP rises.

Stage II

TP increases at a decreasing rate.
MP falls but remains positive.
Rational stage of production.

Stage III

TP decreases.
MP becomes negative.
Production becomes inefficient.

11. Returns to Scale (Long Run)

Returns to Scale explain what happens when all inputs are increased together.

(A) Constant Returns to Scale (CRS)

Inputs increase by a certain percentage.
Output increases by the same percentage.

Example:
Inputs ↑ 20%
Output ↑ 20%

(B) Increasing Returns to Scale (IRS)

Output increases by a greater percentage than inputs.

Example:
Inputs ↑ 20%
Output ↑ 30%

Reason:

Better specialization
Efficient management
Economies of scale

(C) Decreasing Returns to Scale (DRS)

Output increases by a smaller percentage than inputs.

Example:
Inputs ↑ 20%
Output ↑ 10%

Reason:

Management difficulties
Overcrowding
Inefficiency

12. Cost

Cost is the money spent by a producer on purchasing inputs.

13. Types of Cost (Short Run)

(A) Total Fixed Cost (TFC)

Expenses that do not change with output.

Examples:

Rent
Salary of permanent staff
Insurance

Features

Remains constant.
Exists even if production is zero.

(B) Total Variable Cost (TVC)

Costs that change with production.

Examples:

Raw material
Wages of temporary workers
Electricity for production

Features

Zero when output is zero.
Increases with output.

(C) Total Cost (TC)

Formula

TC = TFC + TVC

14. Average Costs

Average Fixed Cost (AFC)

AFC = TFC ÷ Output

Features

Always falls.
Never becomes zero.

Average Variable Cost (AVC)

AVC = TVC ÷ Output

Features

U-shaped curve.

Short Run Average Cost (SAC)

SAC = TC ÷ Output

SAC = AFC + AVC

Features

U-shaped curve.

15. Marginal Cost (MC)

Marginal Cost is the additional cost of producing one extra unit of output.

Formula

MC = Change in TC ÷ Change in Output

Features

U-shaped curve.

16. Relationship between MC and AVC

MC < AVC → AVC falls.
MC = AVC → AVC is minimum.
MC > AVC → AVC rises.

MC cuts AVC at its minimum point.

17. Relationship between MC and SAC

MC < SAC → SAC falls.
MC = SAC → SAC is minimum.
MC > SAC → SAC rises.

MC cuts SAC at its minimum point.

18. Long Run Cost

In the long run:

There is no fixed cost.
All costs are variable.

Long Run Average Cost (LRAC)

LRAC = TC ÷ Output

Long Run Marginal Cost (LRMC)

LRMC = Change in TC ÷ Change in Output

Both LRAC and LRMC are generally U-shaped.

Important Formula Sheet

Q = f(L, K)
AP = TP ÷ L
MP = ΔTP ÷ ΔL
TC = TFC + TVC
AFC = TFC ÷ Q
AVC = TVC ÷ Q
SAC = TC ÷ Q
SAC = AFC + AVC
MC = ΔTC ÷ ΔQ
LRAC = TC ÷ Q
LRMC = ΔTC ÷ ΔQ

One-Mark Revision

Production → Conversion of inputs into output.
Production Function → Relationship between inputs and maximum output.
Short Run → At least one factor fixed.
Long Run → All factors variable.
TP → Total output.
AP → Output per unit of labour.
MP → Extra output from one extra unit of labour.
Isoquant → Same output, different input combinations.
CRS → Output increases in the same proportion as inputs.
IRS → Output increases more than inputs.
DRS → Output increases less than inputs.
TFC → Fixed cost.
TVC → Variable cost.
TC = TFC + TVC.
MC → Extra cost of one more unit.
AFC always falls.
AVC and SAC are U-shaped.
MC cuts AVC and SAC at their minimum points.

MCQs (Part 1: Questions 1–30)

1. Production refers to the process of:

A. Selling goods to consumers
B. Converting inputs into outputs
C. Buying raw materials
D. Transporting goods

Answer: B

2. A production function shows:

A. Minimum output from inputs
B. Average output
C. Maximum output from given inputs
D. Total revenue

Answer: C

3. Which of the following is NOT a factor of production considered in this chapter?

A. Labour
B. Capital
C. Land
D. Entrepreneurship

Answer: D

4. Which symbol generally represents labour in a production function?

A. Q
B. L
C. K
D. P

Answer: B

5. Which symbol generally represents capital?

A. C
B. P
C. K
D. R

Answer: C

6. In the equation Q = f(L, K), Q represents:

A. Quality
B. Quantity demanded
C. Output
D. Cost

Answer: C

7. A production function is valid for:

A. Any technology
B. A given technology
C. Only old technology
D. Future technology only

Answer: B

8. Improvement in technology generally:

A. Reduces maximum output
B. Leaves production unchanged
C. Increases maximum possible output
D. Eliminates labour

Answer: C

9. Efficient production means:

A. Producing at maximum possible output from given inputs
B. Using maximum labour only
C. Using minimum capital only
D. Producing the cheapest product

Answer: A

10. Which expression correctly represents a production function?

A. TC = TVC + TFC
B. Q = f(L, K)
C. MC = ΔTC
D. AP = MP × TP

Answer: B

11. In the short run:

A. All factors are variable
B. At least one factor is fixed
C. All factors are fixed
D. Production stops

Answer: B

12. In the long run:

A. Only labour changes
B. Only capital changes
C. All factors are variable
D. No factor can change

Answer: C

13. The factor that cannot be changed in the short run is called:

A. Variable factor
B. Fixed factor
C. Active factor
D. Mobile factor

Answer: B

14. Which of the following is usually treated as the variable factor in short-run analysis?

A. Labour
B. Building
C. Machinery
D. Factory land

Answer: A

15. An isoquant represents:

A. Equal cost
B. Equal revenue
C. Equal output
D. Equal profit

Answer: C

16. Two points on the same isoquant indicate:

A. Equal cost
B. Equal labour
C. Equal capital
D. Equal output

Answer: D

17. Isoquants are generally:

A. Positively sloped
B. Horizontally straight
C. Negatively sloped
D. Vertically straight

Answer: C

18. Higher isoquants indicate:

A. Lower output
B. Same output
C. Higher output
D. Zero output

Answer: C

19. Total Product (TP) means:

A. Output per worker
B. Extra output from one additional worker
C. Total output produced
D. Average output

Answer: C

20. Average Product (AP) is calculated as:

A. TP × Labour
B. TP ÷ Labour
C. Labour ÷ TP
D. MP × TP

Answer: B

21. Marginal Product (MP) measures:

A. Total production
B. Output per worker
C. Additional output from one extra unit of labour
D. Total labour employed

Answer: C

22. Which formula is correct?

A. MP = ΔTP ÷ ΔLabour
B. MP = TP ÷ Labour
C. MP = TC ÷ Output
D. MP = AP + TP

Answer: A

23. The sum of marginal products is equal to:

A. Average Product
B. Total Product
C. Marginal Cost
D. Total Cost

Answer: B

24. When MP is greater than AP:

A. AP rises
B. AP falls
C. AP remains constant
D. TP becomes zero

Answer: A

25. When MP equals AP:

A. AP is minimum
B. AP is maximum
C. TP is zero
D. MP becomes negative

Answer: B

26. When MP becomes smaller than AP:

A. AP rises
B. AP becomes maximum
C. AP starts falling
D. TP becomes zero

Answer: C

27. According to the Law of Variable Proportions, MP:

A. Always rises
B. Always falls
C. First rises and then falls
D. Remains constant

Answer: C

28. The Law of Variable Proportions applies when:

A. All factors are variable
B. One factor is fixed
C. No factors are used
D. Technology changes continuously

Answer: B

29. The main reason for diminishing marginal product is:

A. Improvement in technology
B. Overuse of the variable factor with fixed factors unchanged
C. Increase in selling price
D. Increase in demand

Answer: B

30. Which stage of production is considered economically rational?

A. Stage I
B. Stage II
C. Stage III
D. Stage IV

Answer: B

31. Returns to Scale are studied in the:

A. Very short run
B. Short run
C. Long run
D. Market period

Answer: C

32. Returns to Scale refer to a situation where:

A. Only labour is increased
B. Only capital is increased
C. All inputs are increased together
D. Output is kept constant

Answer: C

33. If all inputs increase by 20% and output also increases by 20%, the firm experiences:

A. Increasing Returns to Scale
B. Decreasing Returns to Scale
C. Constant Returns to Scale
D. Negative Returns to Scale

Answer: C

34. Increasing Returns to Scale occur when:

A. Output increases less than inputs
B. Output increases more than inputs
C. Output remains unchanged
D. Inputs decrease

Answer: B

35. Decreasing Returns to Scale occur when:

A. Output increases more than inputs
B. Output increases exactly equal to inputs
C. Output increases less than inputs
D. Output decreases to zero

Answer: C

36. Which of the following is most likely to cause Increasing Returns to Scale?

A. Better specialization
B. Scarcity of labour
C. Poor management
D. Rising fixed costs

Answer: A

37. Which of the following may lead to Decreasing Returns to Scale?

A. Efficient use of resources
B. Better technology
C. Managerial inefficiency
D. Improved coordination

Answer: C

38. Cost of production means:

A. Selling price of output
B. Expenditure on inputs
C. Total revenue
D. Profit earned

Answer: B

39. A cost function shows:

A. Maximum revenue
B. Least cost of producing different output levels
C. Market demand
D. Selling price

Answer: B

40. A rational producer chooses the input combination that:

A. Uses maximum labour
B. Uses minimum labour
C. Produces at minimum cost
D. Uses maximum capital

Answer: C

41. Total Fixed Cost (TFC) is:

A. Constant in the short run
B. Variable with output
C. Equal to TVC
D. Zero at all output levels

Answer: A

42. Which of the following is generally a fixed cost?

A. Raw material
B. Electricity used in production
C. Factory rent
D. Packaging

Answer: C

43. Total Variable Cost (TVC):

A. Never changes
B. Changes with output
C. Equals Total Cost
D. Is always greater than TFC

Answer: B

44. When output is zero, TVC is generally:

A. Equal to TFC
B. Positive
C. Zero
D. Maximum

Answer: C

45. At zero output, Total Cost equals:

A. TVC
B. Profit
C. TFC
D. Revenue

Answer: C

46. Total Cost is calculated as:

A. TC = TFC − TVC
B. TC = TFC + TVC
C. TC = AFC + AVC
D. TC = MC × Q

Answer: B

47. Which cost always remains unchanged in the short run?

A. TVC
B. TC
C. TFC
D. MC

Answer: C

48. Average Fixed Cost (AFC) is:

A. TFC ÷ Output
B. TVC ÷ Output
C. TC ÷ Output
D. Output ÷ TFC

Answer: A

49. Average Variable Cost (AVC) equals:

A. TC ÷ Output
B. TVC ÷ Output
C. TFC ÷ Output
D. Output ÷ TVC

Answer: B

50. Short Run Average Cost (SAC) is:

A. TFC ÷ Output
B. TVC ÷ Output
C. TC ÷ Output
D. MC ÷ Output

Answer: C

51. Which relation is correct?

A. SAC = AFC + AVC
B. SAC = AFC − AVC
C. SAC = AVC − AFC
D. SAC = MC + AVC

Answer: A

52. Marginal Cost (MC) measures:

A. Cost per unit
B. Additional cost of one extra unit of output
C. Total cost
D. Fixed cost

Answer: B

53. Which formula correctly represents Marginal Cost?

A. MC = ΔTC ÷ ΔQ
B. MC = TC ÷ Q
C. MC = TVC ÷ Q
D. MC = AFC + AVC

Answer: A

54. Which cost curve always slopes downward?

A. AFC
B. AVC
C. SAC
D. MC

Answer: A

55. Which of the following curves is generally U-shaped?

A. AFC
B. AVC
C. TFC
D. None of these

Answer: B

56. Which curve is also U-shaped?

A. SAC
B. TFC
C. AFC
D. TP

Answer: A

57. Which curve first falls and then rises?

A. AFC
B. AVC
C. TFC
D. Total Cost

Answer: B

58. AFC decreases mainly because:

A. Fixed cost is spread over more units of output
B. Variable cost decreases
C. Total cost decreases
D. Output decreases

Answer: A

59. The MC curve cuts the AVC curve:

A. At its highest point
B. At its minimum point
C. At zero output
D. Never intersects

Answer: B

60. The MC curve cuts the SAC curve:

A. At the minimum point of SAC
B. At the maximum point of SAC
C. At zero output
D. At every point

Answer: A

61. In the short run, total fixed cost is represented by:

A. A rising curve
B. A horizontal straight line
C. A U-shaped curve
D. A vertical line

Answer: B

62. Total Variable Cost (TVC) is zero when:

A. Output is maximum
B. Output is minimum but positive
C. Output is zero
D. Output is constant

Answer: C

63. Total Cost curve is:

A. Parallel to TVC
B. Vertical line
C. Vertical sum of TFC and TVC
D. Always decreasing

Answer: C

64. AFC curve looks like:

A. U-shaped curve
B. Straight line
C. Rectangular hyperbola
D. Inverted V

Answer: C

65. As output increases, AFC:

A. Increases
B. Remains constant
C. Decreases
D. Becomes negative

Answer: C

66. The reason AFC falls is:

A. Fixed cost decreases
B. Output increases
C. Fixed cost is spread over more units
D. Variable cost increases

Answer: C

67. AVC curve is generally:

A. Downward sloping only
B. Upward sloping only
C. U-shaped
D. Horizontal

Answer: C

68. SAC curve is U-shaped because:

A. Both AVC and AFC rise
B. AVC rises and AFC falls after a point
C. TFC rises
D. Output is constant

Answer: B

69. At low output levels, SAC falls because:

A. AVC increases rapidly
B. AFC falls faster than AVC rises
C. TFC increases
D. MC is zero

Answer: B

70. At higher output levels, SAC rises because:

A. AVC rises faster than AFC falls
B. AFC rises
C. TFC rises
D. Output stops increasing

Answer: A

71. Marginal Cost depends only on:

A. Fixed cost
B. Variable cost
C. Total revenue
D. Profit

Answer: B

72. MC is derived from:

A. TFC
B. TVC
C. TR
D. Profit

Answer: B

73. When MC falls, MP of labour is:

A. Falling
B. Rising
C. Zero
D. Negative

Answer: B

74. When MP falls, MC:

A. Falls
B. Rises
C. Becomes zero
D. Becomes constant

Answer: B

75. MC is inversely related to:

A. Output
B. Marginal Product
C. Total Cost
D. Fixed Cost

Answer: B

76. AVC is minimum when:

A. MC = AVC
B. MC > AVC
C. MC < AVC
D. AVC = 0

Answer: A

77. SAC is minimum when:

A. MC = SAC
B. MC > SAC
C. MC < SAC
D. AVC = 0

Answer: A

78. MC curve cuts AVC from:

A. Above
B. Below
C. Left side
D. Right side

Answer: B

79. MC curve cuts SAC at:

A. Maximum SAC
B. Minimum SAC
C. Zero output
D. Constant SAC

Answer: B

80. In long run:

A. TFC exists
B. TVC does not exist
C. No fixed cost exists
D. No variable cost exists

Answer: C

81. Long Run Total Cost equals:

A. TFC
B. TVC
C. Total Cost
D. Profit

Answer: C

82. LRAC is also called:

A. Per unit cost
B. Fixed cost
C. Total revenue
D. Marginal profit

Answer: A

83. LRAC curve is generally:

A. Straight line
B. U-shaped
C. Horizontal
D. Vertical

Answer: B

84. Increasing Returns to Scale leads to:

A. Rising average cost
B. Falling average cost
C. Constant cost
D. Zero output

Answer: B

85. Decreasing Returns to Scale leads to:

A. Falling average cost
B. Rising average cost
C. Constant output
D. Zero cost

Answer: B

86. Constant Returns to Scale means:

A. Output increases faster than inputs
B. Output increases slower than inputs
C. Output increases proportionally with inputs
D. Output decreases

Answer: C

87. Production function is based on:

A. Demand conditions
B. Technology
C. Price level
D. Income

Answer: B

88. Isoquant is similar to:

A. Budget line
B. Indifference curve
C. Supply curve
D. Demand curve

Answer: B

89. A rational producer always aims to:

A. Maximise output only
B. Minimise cost only
C. Maximise profit
D. Minimise labour

Answer: C

90. Which of the following is NOT a cost concept?

A. TC
B. TR
C. AVC
D. MC

Answer: B

91. When TP is increasing at a decreasing rate, MP is:

A. Rising
B. Constant
C. Falling
D. Negative

Answer: C

92. TP is maximum when:

A. MP is maximum
B. MP is zero
C. MP is negative
D. AP is zero

Answer: B

93. When MP becomes negative:

A. TP increases
B. TP decreases
C. AP increases
D. MC becomes zero

Answer: B

94. AP is maximum when:

A. MP = AP
B. MP = 0
C. TP is zero
D. MC is minimum

Answer: A

95. If MP is above AP:

A. AP falls
B. AP rises
C. AP is constant
D. TP falls

Answer: B

96. If MP is below AP:

A. AP rises
B. AP falls
C. AP is maximum
D. TP rises

Answer: B

97. The stage where production is economically efficient is:

A. Stage I
B. Stage II
C. Stage III
D. Stage IV

Answer: B

98. In Stage I of production:

A. MP is negative
B. MP is rising
C. TP falls
D. AP is zero

Answer: B

99. In Stage III:

A. TP increases
B. MP is positive
C. MP is negative
D. AP is rising

Answer: C

100. Law of variable proportions is also called:

A. Law of supply
B. Law of demand
C. Law of diminishing marginal returns
D. Law of scale

Answer: C

101. A production function relates:

A. Price and quantity
B. Inputs and output
C. Cost and revenue
D. Demand and supply

Answer: B

102. Which is NOT a short-run cost?

A. TFC
B. TVC
C. TC
D. LRAC

Answer: D

103. Opportunity cost is:

A. Accounting cost only
B. Best alternative forgone
C. Total revenue
D. Fixed cost

Answer: B

104. If output increases, TVC:

A. Falls
B. Rises
C. Becomes zero
D. Remains constant

Answer: B

105. Which cost never becomes zero?

A. TVC
B. TFC
C. MC
D. AVC

Answer: B

106. TC curve starts from:

A. Origin
B. TFC value
C. Maximum point
D. Negative axis

Answer: B

107. AVC is U-shaped because:

A. MP increases then falls
B. TFC increases
C. Demand changes
D. Price changes

Answer: A

108. MC curve is derived from:

A. TC curve slope
B. TFC only
C. AVC only
D. AP curve

Answer: A

109. MC is lowest when:

A. TP is highest
B. MP is highest
C. AP is highest
D. AVC is highest

Answer: B

110. Which curve is never negative?

A. MP
B. AP
C. TFC
D. TP

Answer: C

111. If TP is constant, MP is:

A. Positive
B. Zero
C. Negative
D. Increasing

Answer: B

112. Isoquants represent:

A. Cost combinations
B. Input combinations producing same output
C. Revenue levels
D. Profit levels

Answer: B

113. Isoquants slope:

A. Upward
B. Downward
C. Vertical
D. Horizontal

Answer: B

114. A firm always tries to produce:

A. At maximum cost
B. At minimum output
C. At least cost
D. At highest demand

Answer: C

115. LRAC curve shows:

A. Cost per unit in short run
B. Cost per unit in long run
C. Total cost
D. Fixed cost

Answer: B

116. Economies of scale mean:

A. Rising cost
B. Falling cost
C. Constant cost
D. Zero output

Answer: B

117. Diseconomies of scale mean:

A. Falling cost
B. Rising cost
C. Constant cost
D. Zero input

Answer: B

118. Constant returns to scale means:

A. Increasing cost
B. Decreasing cost
C. Constant cost per unit
D. Zero output

Answer: C

119. Production efficiency means:

A. Maximum output from given inputs
B. Maximum cost
C. Minimum revenue
D. Zero labour

Answer: A

120. A firm’s main objective is:

A. Revenue maximisation
B. Cost minimisation only
C. Profit maximisation
D. Output minimisation

Answer: C

121. In numerical MCQs, if labour increases from 2 to 3 and TP rises from 24 to 40, MP is:

A. 14
B. 16
C. 18
D. 24

Answer: B
(40 − 24 = 16)

122. If TP = 50 and labour = 5, AP is:

A. 5
B. 10
C. 15
D. 25

Answer: B
(50 ÷ 5 = 10)

123. If MP is falling but positive, TP is:

A. Falling
B. Rising at decreasing rate
C. Constant
D. Negative

Answer: B

124. If MC is rising, MP is:

A. Rising
B. Falling
C. Constant
D. Zero

Answer: B

125. If MC = 10 and AVC = 10, AVC is:

A. Minimum
B. Maximum
C. Zero
D. Undefined

Answer: A

126. If SAC = MC, SAC is:

A. Maximum
B. Minimum
C. Rising
D. Constant

Answer: B

127. If output increases but TC remains constant, MC is:

A. Positive
B. Negative
C. Zero
D. Infinite

Answer: C

128. If TFC = 100 and output = 10, AFC is:

A. 5
B. 10
C. 15
D. 20

Answer: B

129. If TVC increases from 20 to 30 when output increases from 2 to 3, MC is:

A. 5
B. 8
C. 10
D. 15

Answer: C

130. If AVC is falling, MC is:

A. Above AVC
B. Below AVC
C. Equal to AVC
D. Zero

Answer: B

131. A U-shaped MC curve is due to:

A. Law of demand
B. Law of diminishing marginal product
C. Law of supply
D. Inflation

Answer: B

132. Which cost curve is always above AVC?

A. MC
B. AFC
C. SAC
D. MP

Answer: C

133. At very low output, AFC is:

A. Very low
B. Very high
C. Zero
D. Negative

Answer: B

134. If output doubles and inputs less than double, it is:

A. DRS
B. CRS
C. IRS
D. None

Answer: C

135. If inputs double and output doubles exactly, it is:

A. IRS
B. CRS
C. DRS
D. MP

Answer: B

136. If inputs double and output increases less than double:

A. IRS
B. CRS
C. DRS
D. AP

Answer: C

137. A firm producing where MC = MR (not in chapter but logic link) ensures:

A. Loss
B. Profit maximisation
C. Zero output
D. Rising cost

Answer: B

138. Production increases most efficiently in:

A. Stage I
B. Stage II
C. Stage III
D. Stage IV

Answer: B

139. Which is NOT part of production function?

A. Labour
B. Capital
C. Price
D. Technology

Answer: C

140. Technology improvement shifts production function:

A. Downward
B. Upward
C. No change
D. To zero

Answer: B

141. Isoquant map shows:

A. Cost levels
B. Output levels
C. Profit levels
D. Revenue levels

Answer: B

142. Isoquants never intersect because:

A. Cost differs
B. Output differs
C. Labour differs
D. Capital differs

Answer: B

143. MP becomes zero when:

A. TP is maximum
B. TP is minimum
C. AP is maximum
D. MC is minimum

Answer: A

144. AP is highest when:

A. MP = AP
B. MP = 0
C. TP = 0
D. MC = 0

Answer: A

145. A rational producer avoids:

A. Stage I
B. Stage II
C. Stage III
D. All stages

Answer: C

146. Fixed cost exists only in:

A. Long run
B. Short run
C. Both
D. Neither

Answer: B

147. Long run has:

A. Only fixed cost
B. Only variable cost
C. No fixed cost
D. No variable cost

Answer: C

148. MC curve intersects AVC at:

A. Maximum AVC
B. Minimum AVC
C. Zero AVC
D. Constant AVC

Answer: B

149. SAC is minimum when:

A. MC is minimum
B. AVC is maximum
C. MP is zero
D. TP is zero

Answer: A

150. This chapter mainly studies:

A. Consumer behaviour
B. Government policy
C. Production and cost behaviour of firms
D. Banking system

Answer: C

ASSERTION–REASON QUESTIONS (1–30)

Directions:

Choose the correct option:
A. Both A and R are true and R is correct explanation of A
B. Both A and R are true but R is not correct explanation of A
C. A is true but R is false
D. A is false but R is true

1.

A: In the short run, at least one factor of production is fixed.
R: Firms can change all inputs in the short run.

Answer: C

2.

A: Production function shows maximum possible output.
R: It is based on given technology.

Answer: A

3.

A: MP increases initially and then falls.
R: Due to law of variable proportions.

Answer: A

4.

A: TP is maximum when MP is zero.
R: MP measures additional output.

Answer: A

5.

A: AP increases when MP is greater than AP.
R: AP is average of marginal products.

Answer: A

6.

A: AFC curve always slopes downward.
R: TFC is constant while output increases.

Answer: A

7.

A: MC curve is U-shaped.
R: MP first rises and then falls.

Answer: A

8.

A: MC is derived from TVC.
R: Fixed cost does not affect MC.

Answer: A

9.

A: SAC is sum of AFC and AVC.
R: Both are per unit costs.

Answer: A

10.

A: SMC cuts AVC at minimum point.
R: When MC = AVC, AVC is minimum.

Answer: A

11.

A: Isoquants are downward sloping.
R: More of one input requires less of another for same output.

Answer: A

12.

A: Isoquants never intersect.
R: Each represents different output level.

Answer: A

13.

A: Returns to scale applies in short run.
R: All inputs are variable in short run.

Answer: D

14.

A: CRS means output increases proportionally.
R: Inputs increase proportionally.

Answer: A

15.

A: IRS leads to falling average cost.
R: Output increases more than inputs.

Answer: A

16.

A: DRS leads to rising average cost.
R: Inputs increase more than output.

Answer: A

17.

A: TFC remains constant even if output is zero.
R: Fixed inputs cannot be changed in short run.

Answer: A

18.

A: TVC is zero at zero output.
R: Variable inputs are not used at zero output.

Answer: A

19.

A: TC increases with output.
R: TVC increases with output.

Answer: B

20.

A: MC depends only on TVC.
R: TFC does not change with output.

Answer: A

21.

A: AP rises when MP rises.
R: MP is change in TP.

Answer: B

22.

A: MP becomes negative in Stage III.
R: TP starts falling.

Answer: A

23.

A: Stage II is rational stage.
R: TP increases at diminishing rate.

Answer: A

24.

A: LRAC is U-shaped.
R: Returns to scale change over output levels.

Answer: A

25.

A: MC is minimum when MP is maximum.
R: MP and MC are inversely related.

Answer: A

26.

A: AFC falls continuously.
R: Fixed cost is divided among more units.

Answer: A

27.

A: SAC curve lies above AVC curve.
R: SAC includes AFC.

Answer: A

28.

A: MC can be negative.
R: TVC can fall at higher output.

Answer: A

29.

A: Long run has no fixed cost.
R: All factors are variable.

Answer: A

30.

A: Production efficiency is achieved in Stage II.
R: MP is positive but falling.

Answer: A

FILL IN THE BLANKS (1–40)

1. Production is the process of converting ______ into output.

Answer: inputs

2. Production function shows maximum ______ from given inputs.

Answer: output

3. In Q = f(L, K), L stands for ______.

Answer: labour

4. In Q = f(L, K), K stands for ______.

Answer: capital

5. Short run is a period when at least one factor is ______.

Answer: fixed

6. Long run is a period when all factors are ______.

Answer: variable

7. Isoquants represent same level of ______.

Answer: output

8. TP stands for ______ product.

Answer: total

9. AP means ______ product.

Answer: average

10. MP means ______ product.

Answer: marginal

11. MP is change in TP divided by change in ______.

Answer: labour

12. AP is TP divided by ______.

Answer: labour

13. Law of variable proportions is also called law of diminishing ______ product.

Answer: marginal

14. TP is maximum when MP becomes ______.

Answer: zero

15. MP becomes negative in Stage ______ of production.

Answer: III

16. Stage II is the ______ stage of production.

Answer: rational

17. Increasing Returns to Scale means output increases more than ______.

Answer: inputs

18. Constant Returns to Scale means output increases proportionally with ______.

Answer: inputs

19. Decreasing Returns to Scale means output increases less than ______.

Answer: inputs

20. Cost of fixed inputs is called ______ cost.

Answer: fixed

21. Cost of variable inputs is called ______ cost.

Answer: variable

22. Total Cost = TFC + ______.

Answer: TVC

23. AFC = TFC divided by ______.

Answer: output

24. AVC = TVC divided by ______.

Answer: output

25. SAC = TC divided by ______.

Answer: output

26. MC stands for ______ cost.

Answer: marginal

27. MC = change in TC divided by change in ______.

Answer: output

28. AFC curve is always ______ sloping.

Answer: downward

29. AVC and SAC curves are generally ______ shaped.

Answer: U

30. MC curve is also ______ shaped.

Answer: U

31. MC cuts AVC at its ______ point.

Answer: minimum

32. MC cuts SAC at its ______ point.

Answer: minimum

33. In long run, there is no ______ cost.

Answer: fixed

34. LRAC stands for long run ______ cost.

Answer: average

35. LRMC stands for long run ______ cost.

Answer: marginal

36. Economies of scale lead to ______ cost.

Answer: falling

37. Diseconomies of scale lead to ______ cost.

Answer: rising

38. CRS means constant returns to ______.

Answer: scale

39. Isoquants are similar to ______ curves.

Answer: indifference

40. A rational producer always aims to maximise ______.

Answer: profit

CASE-BASED + NUMERICAL QUESTIONS (1–10)

📘 Case 1: Production Function

A firm uses labour and capital to produce output. With 1 unit of labour and 4 units of capital, output is 10 units. When labour increases to 2 units (capital fixed at 4), output becomes 24 units.

1. Marginal Product of 2nd unit of labour is:

A. 10
B. 12
C. 14
D. 24

Answer: C
(24 − 10 = 14)

2. Average Product of labour when L = 2 is:

A. 10
B. 12
C. 14
D. 24

Answer: B
(24 ÷ 2 = 12)

3. MP is maximum when:

A. TP is minimum
B. TP increases at increasing rate
C. TP is zero
D. AP is zero

Answer: B

📘 Case 2: Cost Schedule

Output	TC
0	20
1	30
2	38
3	44

4. Total Fixed Cost (TFC) is:

A. 10
B. 20
C. 30
D. 38

Answer: B

5. Total Variable Cost at output 3 is:

A. 20
B. 24
C. 44
D. 64

Answer: B
(44 − 20 = 24)

6. Marginal Cost between output 1 and 2 is:

A. 6
B. 8
C. 10
D. 12

Answer: B
(38 − 30 = 8)

📘 Case 3: Cost Curves

A firm observes that MC falls initially and then rises due to changes in productivity.

7. MC is U-shaped because of:

A. Law of demand
B. Law of variable proportions
C. Inflation
D. Fixed cost

Answer: B

8. MC is derived from:

A. TFC
B. TVC
C. Profit
D. Revenue

Answer: B

📘 Case 4: Returns to Scale

A firm doubles all inputs and output increases more than double.

9. The firm experiences:

A. CRS
B. IRS
C. DRS
D. Zero returns

Answer: B

10. Reason for IRS is:

A. Diseconomies
B. Economies of scale
C. Fixed cost
D. Zero output

Answer: B

SHORT ANSWER QUESTIONS (3 MARKS) – 1 to 10

1. Define production function. Explain its importance.

Answer:
A production function shows the relationship between inputs (labour, capital) and the maximum possible output produced with given technology.
It helps a firm decide how much output can be produced with different combinations of inputs and ensures efficient use of resources.

2. Distinguish between short run and long run.

Answer:

Short run: At least one factor is fixed; only variable inputs can be changed.
Long run: All factors are variable; no fixed input exists.
In short run, output changes by changing variable inputs; in long run, firm can change scale of production.

3. What is marginal product? How is it calculated?

Answer:
Marginal product is the additional output produced by using one more unit of labour while keeping other inputs constant.
Formula:
MP = Change in TP ÷ Change in Labour

4. State the law of variable proportions.

Answer:
When one input is increased while other inputs remain fixed, marginal product of the variable input first increases, then decreases, and may become negative. This is called the law of variable proportions.

5. Why does marginal product fall after a point?

Answer:
Because of overcrowding of variable input with fixed input, efficient use of fixed resources declines, reducing additional output from each extra unit of labour.

6. Define isoquant.

Answer:
An isoquant is a curve showing all combinations of inputs that produce the same level of output. It represents equal output levels using different input combinations.

7. Why are isoquants downward sloping?

Answer:
Because if one input increases, the other must decrease to maintain the same level of output.

8. Define total, average and marginal product.

Answer:

TP: Total output produced
AP: Output per unit of labour (TP ÷ L)
MP: Additional output from one extra unit of labour

9. What is the rational stage of production?

Answer:
Stage II is the rational stage because TP increases at a decreasing rate, MP is positive but falling, and resources are used efficiently.

10. What is the relationship between TP and MP?

Answer:

TP increases when MP is positive
TP is maximum when MP is zero
TP falls when MP is negative

📗 Chapter 3: LONG ANSWER QUESTIONS (5–6 MARKS) – 11 to 20

11. Explain the law of variable proportions with diagram (theory only).

Answer:
The law states that when one input is increased while other inputs are fixed, output initially increases at an increasing rate, then at a diminishing rate, and finally decreases.

Stages:

Stage I: Increasing MP
Stage II: Diminishing MP (rational stage)
Stage III: Negative MP

Reason: imbalance between fixed and variable inputs causes inefficiency after a point.

12. Explain different stages of production.

Answer:

Stage I: TP increases rapidly, MP rises
Stage II: TP increases slowly, MP falls but positive
Stage III: TP declines, MP negative

Firm operates in Stage II only.

13. Explain total cost, fixed cost and variable cost.

Answer:

Fixed cost: Does not change with output (rent, machinery)
Variable cost: Changes with output (labour, raw materials)
Total cost: TC = TFC + TVC

14. Why is AFC curve rectangular hyperbola?

Answer:
Because AFC = TFC ÷ output. Since TFC is constant and output increases, AFC falls continuously but never reaches zero, forming a rectangular hyperbola.

15. Explain marginal cost and its behaviour.

Answer:
Marginal cost is additional cost of producing one extra unit of output. It first falls due to increasing returns, then rises due to diminishing returns, forming a U-shape.

16. Why does MC curve cut AVC and SAC at minimum points?

Answer:
Because when MC is below AVC/SAC, they fall; when MC is above them, they rise. Hence, MC intersects them at their minimum points.

17. Explain returns to scale.

Answer:

IRS: Output increases more than inputs
CRS: Output increases proportionally
DRS: Output increases less than inputs

18. Explain long run cost curves.

Answer:
In long run, all costs are variable. LRAC is U-shaped due to:

IRS at low output
CRS at middle output
DRS at high output

19. Why is production function important?

Answer:
It helps firms:

Decide optimal input combination
Maximise output
Reduce cost
Improve efficiency

20. Explain relationship between MC and MP.

Answer:

MP increases → MC decreases
MP decreases → MC increases
Thus, MC and MP are inversely related.