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Theory of Production and Costs

This document contains 8 questions about production theory and costs. It includes production functions, tables showing output levels and associated total, average and marginal costs and products. It asks students to analyze the relationships between these metrics, identify points where concepts like diminishing returns occur, and draw diagrams to illustrate production stages and cost curves. The questions assess understanding of foundational concepts in production theory including the law of diminishing returns, stages of production, and the relationships between different cost metrics in the short and long run.

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Nur
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67 views6 pages

Theory of Production and Costs

This document contains 8 questions about production theory and costs. It includes production functions, tables showing output levels and associated total, average and marginal costs and products. It asks students to analyze the relationships between these metrics, identify points where concepts like diminishing returns occur, and draw diagrams to illustrate production stages and cost curves. The questions assess understanding of foundational concepts in production theory including the law of diminishing returns, stages of production, and the relationships between different cost metrics in the short and long run.

Uploaded by

Nur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 5

THEORY OF PRODUCTION AND COSTS

QUESTION 1

The table below shows the production function of an agricultural product. Answer the
following questions.

Fertiliser Land (Acre) Average Product Total Product Marginal


(Tonne) (kg) (kg) Product (kg)
1 2 70
2 2 80
3 2 90
4 2 90
5 2 80
6 2 70
7 2 60
8 2 50

a) Fill in the columns for total product and marginal product.

b) What is the relationship between average product and marginal product?

c) Sketch a diagram showing the three (3) production stages.

d) Briefly explain the law of diminishing returns and identify the level of variable input at
which it starts to take place.
QUESTION 2

The questions below are based on the following table that provides information on
production of a product that requires one variable input.

Input (unit) Total Product (unit)


0 0
1 5
2 20
3 32
4 42
5 50
6 55
7 58
8 58
9 56

a) At which level of input shows:


i) increasing marginal returns?

ii) diminishing marginal return set in?

iii) negative marginal returns?

b) What is the value of total product when the marginal product is zero?

c) What is the main difference between short run and long run in production theory?

QUESTION 3

The following table shows the quantity of labor used at various levels of production in a firm.

Labor Total Product Average Product Marginal Product


(Unit) (Unit) (Unit)
0 0
1 15
2 34
3 51
4 60
5 67
6 71
7 74
8 73
a) Calculate the average product and marginal product at each level of labor.

b) Draw the total product, average product and marginal product curves for each level of
labor.

QUESTION 4

Total Average Average Total Average Marginal


Output Variable Fixed Cost Variable Cost Cost Cost
Cost Cost
0 0 100
1 50
2 42
3 36
4 32
5 30
6 30
7 31
8 33

Based on the table above, answer the following questions:

a) Fill in the blank columns for every level of output.

b) In what period is this firm operating? Give your reason.

c) Draw a diagram to show the average cost, average fixed cost, average variable cost
and marginal cost curves.
QUESTION 5

Table below shows the total cost and the average costs of a firm.

Output Total Total cost Average Average Marginal


(unit) variable (TC) Variable Total Cost cost (MC)
cost (TVC) Cost (AVC) (ATC)
0 300
1 100
2 225
3 70
4 590
5 400

a) Define total fixed cost and total variable cost.

b) Complete the table above.

c) How much is the total fixed cost for the firm?

d) Calculate the AFC when output is 6 units.

QUESTION 6

The following table shows the output and cost of a firm.

Total Product Total Cost Average Variable Cost Marginal Cost (RM)
(unit) (RM) (RM)
0 50 - -
1 70
2 85
3 95
4 100
5 110
6 130
7 165
8 215

a) Calculate the value of average variable cost (AVC) and marginal cost (MC) for the
table above.
b) At 2 units of output, calculate the value of average fixed cost (AFC).

c) Compute the average total cost (AC) of the firm at 6 units of output.

d) Is the firm operating in short-run or long-run production? Give your reason.

QUESTION 7

Using a diagram, explain the three stages of production.


QUESTION 8

With an illustration, discuss the average cost, average fixed cost, average variable cost and
marginal cost curves in a production.

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