All questions of Production and Costs for Commerce Exam

**Marginal Revenue: Addition to the total revenue on the sale of an additional unit of Output**

Marginal revenue is a concept used in economics to describe the additional revenue generated from the sale of one additional unit of output or product. It is the change in total revenue that occurs as a result of producing and selling one more unit of a product.

**Explanation:**

Marginal revenue is calculated by dividing the change in total revenue by the change in the quantity of output sold. It represents the increase in revenue that a firm earns when it sells one more unit of output.

To understand this concept, let's consider an example of a company that sells smartphones. Suppose the company sells its smartphones for $500 each, and it sells 1000 units in a month, resulting in a total revenue of $500,000. Now, if the company decides to produce and sell one more smartphone, it would have to adjust its price to attract buyers. Let's assume the company reduces the price to $400 for the additional unit.

In this case, the marginal revenue for the additional unit would be $400 because that is the amount of revenue generated from the sale of that unit. The total revenue after selling 1001 units would be $500,000 + $400 = $500,400. Therefore, the marginal revenue for the additional unit is $400.

It is important to note that marginal revenue can vary depending on the market conditions, demand for the product, and the pricing strategies employed by the firm. In some cases, marginal revenue may be positive, indicating an increase in revenue from selling an additional unit. However, in certain situations, such as when the market is highly competitive, marginal revenue may be negative, indicating a decrease in revenue from selling an additional unit.

Overall, marginal revenue is a crucial concept for businesses as it helps them determine the optimal level of production and pricing strategies to maximize their profits. By understanding the change in revenue associated with each additional unit of output, firms can make informed decisions regarding their production and pricing policies.

Explanation:

The short run refers to a period in which at least one factor of production is fixed, while others are variable. In the case of the APP (Average Physical Product), it refers to the average amount of output per unit of input, and it can be calculated by dividing the total output by the total input.

The general shape of the APP in the short run is determined by the law of diminishing returns, which states that as more and more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease, and this will affect the average physical product.

The graph of the APP in the short run will have a U-shaped curve, and it will reach its maximum point when the marginal product is equal to zero. However, the question is asking for the general shape of the APP in the short run, which means that it can also have other shapes, depending on the specific conditions of production.

The correct answer is option 'D', which refers to the inverse U-shaped curve. This shape occurs when the marginal product of the variable input is negative, which means that adding more units of the variable input will decrease the total output. This can happen when there are too many units of the variable input relative to the fixed input, or when the variable input is of poor quality.

In summary, the general shape of the APP in the short run is determined by the law of diminishing returns, and it can be U-shaped, inverse U-shaped, or have other shapes, depending on the specific conditions of production.

Dividing TC by no. Of the units

At the point of maximum total revenue m the slope of the total revenue curve is zero and the marginal revenue is therefore also zero. The marginal revenue curve thus crosses the horizontal axis at the quantity at which the total revenue is maximum.

The correct answer is B

Explanation:

Average Revenue (AR) is a concept in economics that refers to the total revenue earned by a firm per unit of output sold. It is calculated by dividing the total revenue by the quantity of output sold.

Definition:

Average Revenue (AR) can be defined as the total revenue per unit of output sold.

Calculation:

AR = Total Revenue / Quantity of Output

Meaning:

Average Revenue represents the amount of revenue a firm receives for each unit of output sold. It helps in understanding the pricing and revenue generation of a business.

Importance:

Average Revenue is an important measure for businesses as it helps in determining the revenue generated per unit of output. It is useful for decision-making related to pricing strategies and revenue forecasting.

Example:

For example, if a company sells 100 units of a product and earns a total revenue of $10,000, then the Average Revenue would be $100 ($10,000 / 100 units). This means that the company receives $100 for each unit of the product sold.

Interpretation:

The Average Revenue value helps in understanding the relationship between the price charged for a product and the quantity of output sold. If the AR is high, it indicates that the company is able to charge a higher price for its products, resulting in higher revenue per unit sold. Conversely, if the AR is low, it suggests that the company is charging a lower price, resulting in lower revenue per unit sold.

Conclusion:

In conclusion, Average Revenue (AR) is the total revenue earned by a firm per unit of output sold. It is an important measure for businesses to understand their pricing and revenue generation. It is calculated by dividing the total revenue by the quantity of output sold.

First and Necessary Condition for Equilibrium:

The first and necessary condition for equilibrium in a firm is that the firm's marginal cost (MC) equals marginal revenue (MR). In other words, the rate at which the cost of producing an additional unit of output (MC) is equal to the additional revenue earned from selling that unit (MR).

Explanation:

- Equilibrium in a Firm: Equilibrium in a firm refers to the state where the firm is producing the quantity of output that maximizes its profit. It is the point at which the firm has optimized its production and pricing decisions to achieve the highest level of profit.

- MC = MR: To be in equilibrium, the first condition that must be fulfilled is that the firm's marginal cost (MC) must equal marginal revenue (MR). Marginal cost is the additional cost incurred by the firm in producing one more unit of output, while marginal revenue is the additional revenue earned from selling that additional unit of output.

- Importance of MC = MR: When MC is equal to MR, it implies that the firm is neither overproducing nor underproducing. If MC is less than MR, it means that the firm can increase its profit by producing more units of output. On the other hand, if MC is greater than MR, it indicates that the firm can increase its profit by producing fewer units of output.

- Maximum Profit: The second condition for equilibrium is that the firm's MC must be greater than MR beyond the level of output at which MC = MR. This means that while MC = MR may be fulfilled at more than one output level, only the output level beyond which MC > MR will result in maximum profits for the firm.

- Significance: The fulfillment of the first condition alone, where MC equals MR, does not ensure maximum profits for the firm. It is the combination of MC = MR and MC > MR that leads to the determination of the optimal output level, which maximizes the firm's profit.

In conclusion, the first and necessary condition for equilibrium in a firm is that the firm's marginal cost (MC) equals marginal revenue (MR). This condition ensures that the firm is producing the quantity of output that maximizes its profit. However, it is important to note that MC > MR beyond the level of output at which MC = MR is also required for the firm to achieve maximum profits.

The Law of Increasing Returns may be defined as such “As the proportion of one factor in a combination of factors is increased up to a point, the marginal product of the factor will increase. The phrase 'up to a point' may be carefully noted. The increasing return will be only up to a point.

Increasing returns to scale relate to the long run in which all inputs are variable. Increasing marginal returns related to the short run in which one or more input is variable and one or more input is fixed.

Average cost rises only when Marginal Cost is greater than Average Cost. Average cost falls as long as marginal cost is below average cost (irrespective of the fact that marginal cost is rising or falling).

The upward shift represents the fact that supply often decreases when the costs of production increase, so producers need to get a higher price than before in order to supply a given quantity of output.

Factors affecting Supply: Supply refers to the quantity of a good that the producer plans to sell in the market. Supply will be determined by factors such as price, the number of suppliers, the state of technology, government subsidies, weather conditions and the availability of workers to produce the good.

Money costs refer to the expenses incurred by a producer in the production process. These costs are essential for the smooth functioning of a business and are essential for the calculation of profits.

Heading: Types of Money Costs
- Fixed Costs: These are costs that do not vary with the level of production. For example, rent, salaries of permanent staff, insurance premiums, etc.
- Variable Costs: These are costs that vary with the level of production. For example, raw materials, electricity bills, wages of temporary staff, etc.
- Semi-Variable Costs: These are costs that are partly fixed and partly variable. For example, telephone bills, transportation costs, etc.

Heading: Importance of Money Costs
- Calculation of Profits: Money costs are subtracted from total revenue to calculate profits. Therefore, it is important to accurately calculate these costs.
- Pricing Decisions: Money costs play a crucial role in determining the selling price of goods or services. If the costs are too high, the selling price will have to be increased.
- Budgeting: Money costs help in creating a budget for the business. This helps in identifying areas where costs can be reduced and profits can be maximized.

Heading: Examples of Money Costs
- Raw Materials: This includes the cost of the materials used in the production process.
- Labor Costs: This includes the salaries and wages paid to the employees.
- Overhead Costs: This includes expenses such as rent, utilities, insurance, etc.
- Marketing Costs: This includes expenses incurred in advertising and promoting the product or service.
- Depreciation: This includes the reduction in value of assets over time.

In conclusion, money costs are essential for the smooth functioning of a business. They help in calculating profits, making pricing decisions, and creating budgets. These costs include raw materials, labor costs, overhead costs, marketing costs, and depreciation.

The elasticity of supply measures the degree of responsiveness of quantity supplied at a particular price. It indicates how much the quantity supplied changes in response to a change in price. Elasticity of supply helps us understand the sensitivity of producers to changes in market conditions.

- Definition of Elasticity of Supply:
Elasticity of supply is a measure of how the quantity supplied of a good or service changes in response to a change in its price. It shows the responsiveness of producers to changes in price.

- Formula for Elasticity of Supply:
The formula to calculate the elasticity of supply is:
Elasticity of Supply = (Percentage change in quantity supplied) / (Percentage change in price)

- Interpretation of Elasticity of Supply:
The elasticity of supply can be interpreted as follows:
1. Elastic Supply: If the elasticity of supply is greater than 1, it indicates that the quantity supplied is highly responsive to changes in price. This means that even a small change in price will lead to a relatively large change in the quantity supplied.
2. Inelastic Supply: If the elasticity of supply is less than 1, it indicates that the quantity supplied is not very responsive to changes in price. This means that a change in price will result in a relatively smaller change in the quantity supplied.
3. Unit Elastic Supply: If the elasticity of supply is exactly equal to 1, it indicates that the percentage change in quantity supplied is equal to the percentage change in price. This means that the quantity supplied changes proportionally with the change in price.

- Importance of Elasticity of Supply:
The elasticity of supply is important for several reasons:
1. Production Planning: It helps producers in planning their production levels based on the expected changes in price. If the supply is elastic, producers can easily adjust their production to meet the changes in demand.
2. Price Determination: It plays a crucial role in determining the equilibrium price in the market. If the supply is elastic, a small change in demand will result in a large change in price, and vice versa.
3. Policy Implications: It helps policymakers in understanding the impact of taxes, subsidies, and other government interventions on the supply of goods and services. By analyzing the elasticity of supply, policymakers can design more effective policies to achieve desired outcomes.

In conclusion, the elasticity of supply measures the degree of responsiveness of quantity supplied at a particular price. It provides valuable insights into how producers react to changes in market conditions and helps in decision-making regarding production planning and price determination.

Unit Elastic Supply has a PES of 1, where quantity supplied change by the same percentage as the price change.

Assertion (A): When the price of the goods falls, the supply curve shifts to the right.
Reason (R): When price of the goods falls, the producers sell less as there is a positive relation between price and quantity supplied.

To understand the correct choice between the assertion and reason, let's analyze each statement individually:

Assertion (A): When the price of the goods falls, the supply curve shifts to the right.
The statement is true. According to the law of supply, when the price of goods decreases, producers are less willing to supply the goods at a lower price. Therefore, the quantity supplied decreases. This is represented by a movement along the supply curve, resulting in a leftward shift.

Reason (R): When price of the goods falls, the producers sell less as there is a positive relation between price and quantity supplied.
The statement is false. In reality, there is a positive relationship between price and quantity supplied, which means that as the price increases, producers are willing to supply more goods. Conversely, as the price decreases, producers are willing to supply fewer goods.

Explanation:
The correct choice is option 'C' - Assertion (A) is true, but Reason (R) is false.

The assertion correctly states that when the price of the goods falls, the supply curve shifts to the left. This is because producers are less willing to supply goods at lower prices. As a result, the quantity supplied decreases.

However, the reason incorrectly suggests that producers sell less when the price of goods falls. In reality, when prices decrease, producers sell more goods. This is because they can make a profit even at a lower price due to the positive relationship between price and quantity supplied.

To summarize, while the assertion is true and correctly explains the relationship between price and the supply curve, the reason is false as it incorrectly suggests that producers sell less when the price of goods falls.

The supply curve of a firm shows a graphical representation of quantity supplied at various prices. It is a fundamental concept in economics and is used to analyze the behavior of firms in response to changes in market conditions.

Graphical representation of quantity supplied at various prices:
The supply curve of a firm is a graphical representation that shows the relationship between the price of a good or service and the quantity that a firm is willing and able to supply at that price. It is typically upward sloping, indicating that as the price of a good increases, the quantity supplied by the firm also increases.

The supply curve is derived from the firm's production function, which represents the relationship between the inputs used by the firm and the output it produces. The production function determines the firm's costs of production, which in turn influence its supply decisions.

As the price of a good increases, firms have an incentive to supply more of it as they can earn higher profits. This is reflected in the upward slope of the supply curve. Conversely, if the price of a good decreases, firms may reduce their production as it becomes less profitable, leading to a decrease in the quantity supplied.

The supply curve is typically represented as a line on a graph, with price on the vertical axis and quantity supplied on the horizontal axis. Each point on the curve represents a specific price-quantity combination. By connecting these points, we can obtain a smooth curve that illustrates the relationship between price and quantity supplied.

The slope of the supply curve is important as it indicates the responsiveness of quantity supplied to changes in price. A steeper slope implies a more elastic supply curve, meaning that firms are more responsive to changes in price. On the other hand, a flatter slope indicates a more inelastic supply curve, suggesting that firms are less responsive to price changes.

In summary, the supply curve of a firm is a graphical representation of the quantity supplied at various prices. It provides valuable insights into the behavior of firms and helps economists analyze the dynamics of market supply.

Supply Schedule Definition:
A supply schedule is a tabular representation that shows the quantity of a good or service that suppliers are willing and able to produce and sell at various prices.
Explanation:
The supply schedule is used to illustrate the relationship between price and quantity supplied in the market. It provides valuable information about the behavior of suppliers and their response to changes in price.
Key Points:
- The supply schedule is presented in a table format.
- It lists different prices in one column and the corresponding quantity supplied in another column.
- The quantity supplied represents the amount of a product that producers are willing to sell at a particular price.
- The supply schedule helps to identify the law of supply, which states that as the price of a product increases, the quantity supplied also increases, ceteris paribus.
- It allows for the analysis of market equilibrium, where the quantity supplied equals the quantity demanded.
- The supply schedule can be used to create a graphical representation known as the supply curve, which shows the relationship between price and quantity supplied in a visual format.
Conclusion:
A supply schedule is a tabular representation that provides information about the quantity supplied at different prices. It is an essential tool in understanding the behavior of suppliers and analyzing market dynamics.

The firm's marginal revenue will be equal to average revenue as marginal revenue is net addition to the revenue when an additional unit is produced.

AVC is obtained by dividing the total variable cost by output, i.e., AVC = TVC/Q. Thus, AVC is a part of AC, given AC = AFC + AVC. This is because AC not only includes AVC but also AFC which falls continuously as output rises. Not only this, initially, with the increase in output, AVC falls.

When MR is positive and constant, average and total revenue will both increase at constant rate. False; because when MR is positive and constant, AR will also be positive and constant. However, TR will increase at constant rate.

The price elasticity of demand is a measure of the responsiveness of demand to a change in price. A food is said to be price inelastic, not responsive to price when its own-price elasticity is greater than -1.0. A food is said to be price elastic responsive to price when its own-price elasticity is less than -1.0.

When the price of a good that complements a good decreases, then the quantity demanded of one increases and the demand for the other increases. When the price of a substitute good decreases, the quantity demanded for that good increases, but the demand for the good that it is being substituted for decreases.

Improvement of technology, Increase in production, Better agricultural policy

Improvement of technology:
- The increase in supply of food grains can be attributed to the continuous improvement in agricultural technology.
- Advancements in farming techniques, machinery, and irrigation systems have helped farmers increase their productivity.

Increase in production:
- The production of food grains has steadily increased over the years due to various factors such as improved seeds, fertilizers, and farming practices.
- Farmers are now able to produce more food grains per unit of land, leading to higher overall production.

Better agricultural policy:
- The implementation of better agricultural policies has also played a significant role in increasing the supply of food grains.
- Government initiatives to support farmers, provide subsidies, and improve infrastructure have helped boost food grain production.

All of the above
- Ultimately, it is the combination of improved technology, increased production, and better agricultural policies that have led to the increase in the supply of food grains in India.

A firm has to pay for the inputs it needs. Therefore, inputs, on the one hand, generate costs and, on the other hand, generate output. We first study the relationship between inputs and the output; that is "production function". Then we look at the relationship between the output and costs; that is cost function.

Assertion: When 5 units of a good are sold at ₹ 20, total revenue is ₹ 100.
Reason: Total revenue is the revenue earned by the firm from the total amount of product sold by it.

Explanation:
Definition of Revenue:
Revenue refers to the total income generated by a firm from the sale of its goods or services. It is calculated by multiplying the price per unit by the quantity of units sold.

Explanation of Assertion:
The assertion states that when 5 units of a good are sold at ₹ 20, the total revenue is ₹ 100. This can be calculated by multiplying the price per unit (₹ 20) by the quantity of units sold (5).

Total Revenue Calculation:
Price per unit = ₹ 20
Quantity of units sold = 5
Total revenue = Price per unit * Quantity of units sold
= ₹ 20 * 5
= ₹ 100

Explanation of Reason:
The reason provided states that total revenue is the revenue earned by the firm from the total amount of product sold by it. This is a correct explanation because total revenue is calculated by multiplying the price per unit by the quantity of units sold. It represents the total income generated by the firm from the sale of its goods or services.

Conclusion:
Both the assertion and reason are true, and the reason correctly explains the assertion. When 5 units of a good are sold at ₹ 20, the total revenue is ₹ 100, and total revenue is indeed the revenue earned by the firm from the total amount of product sold by it. Therefore, option (a) is the correct answer.

Fixed and Variable Costs

Fixed costs and variable costs are two types of costs that businesses incur. Understanding the difference between these two types of costs is essential for businesses to make informed decisions about pricing, production levels, and profitability.

Fixed Costs

Fixed costs are expenses that do not change regardless of the level of output. These costs are typically associated with the overhead of the business and include items like rent, salaries, and insurance premiums. Fixed costs are a necessary expense for businesses, regardless of whether they produce goods or services.

Variable Costs

Variable costs are expenses that vary with the level of output. These costs are typically associated with the cost of producing a product or providing a service. Variable costs may include the cost of raw materials, labor, or shipping costs. As production levels increase, variable costs will increase, and as production levels decrease, variable costs will decrease.

Difference between Fixed and Variable Costs

The primary difference between fixed and variable costs is the way in which they change with output levels. Fixed costs do not change with output levels, while variable costs do. This means that regardless of how much a business produces, fixed costs remain the same. On the other hand, as a business produces more, it will incur more variable costs.

For example, consider a manufacturing company that produces widgets. The rent for the factory, the salaries of the administrative staff, and the cost of utilities are all fixed costs. These costs do not change regardless of the number of widgets produced. However, the cost of raw materials, labor, and shipping are all variable costs. As the manufacturing company produces more widgets, it will incur more variable costs.

Conclusion

In summary, fixed costs and variable costs are two types of costs that businesses incur. Fixed costs do not change with output levels, while variable costs do. Understanding the difference between these two types of costs is essential for businesses to make informed decisions about pricing, production levels, and profitability.

One very simple example of a production function might be Q = K + L, where Q is the quantity of output, K is the amount of capital, and L is the amount of labor used in production. For example, a firm with five employees will produce five units of output as long as it has at least five units of capital.

Average product will increase only when marginal product increases. Average product rises only where marginal product rises. Answer: False: Average product may increase even if marginal product does not increase. Marginal product rises and falls at a faster rate than the average product.

Marginal revenue the change in total revenue is below the demand curve. Marginal revenue is related to the price elasticity of demand the responsiveness of quantity demanded to a change in price. When marginal revenue is positive, demand is elastic; and when marginal revenue is negative, demand is inelastic.

Consumers are affected by demonstration effect: Law of Demand states that there is a negative or inverse relationship between the price and quantity demanded of a commodity over a period of time.