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.

Dividing TC by no. Of the units

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.

The Supply Curve of a Firm
The supply curve of a firm is a graphical representation of the quantity of goods or services that a firm is willing and able to supply at various prices. It depicts the relationship between the price of a product and the quantity of that product that a firm is willing to produce and sell in a given time period.
Key Points:
- The supply curve slopes upward from left to right, indicating a positive relationship between price and quantity supplied.
- The quantity supplied is shown on the horizontal axis, while the price is shown on the vertical axis.
- The supply curve is usually depicted as a straight line or an upward-sloping curve.
- The shape of the supply curve can vary depending on factors such as production costs, technology, and government regulations.
- The supply curve shows the firm's response to changes in price, assuming that all other factors remain constant.
- When the price of a product increases, the firm has an incentive to increase its production and supply more of the product.
- Conversely, when the price decreases, the firm may reduce its production and supply less of the product.
Overall, the supply curve of a firm provides valuable information about the quantity of goods or services that a firm is willing and able to supply at different price levels. It helps in understanding the behavior of firms in response to changes in market conditions and assists in analyzing market equilibrium and the determination of prices.

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.

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.

The first condition necessary to achieve equilibrium is the one already mentioned: the net external force on the system must be zero. Expressed as an equation, this is simply. net F = 0. Note that if net F is zero, then the net external force in any direction is zero.

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.

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.

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

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.

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.

Supply Schedule Definition:
A supply schedule is a tabular representation of the quantity supplied at various prices. It shows the relationship between the price of a product and the quantity that producers are willing and able to supply at each price level. This schedule helps to understand the behavior of suppliers in response to changes in price.

Tabular Representation:
A supply schedule presents the data in a table format, with two columns: one for the price of the product and another for the corresponding quantity supplied. Each row represents a different price level, and the quantity supplied at that price is recorded.

Various Prices:
The supply schedule includes various prices to capture the relationship between price and quantity supplied. It shows how the quantity supplied changes as the price of the product changes. By analyzing the supply schedule, we can observe the pattern of supply and identify the factors that influence producers' decisions.

Constant Prices:
The supply schedule does not keep prices constant. Instead, it presents different prices at which the product can be sold. By examining the quantity supplied at each price level, we can determine how suppliers respond to changes in price, which helps in understanding market dynamics.

Graphical Representation:
While the supply schedule is typically presented in a tabular form, it can also be used to create a graphical representation known as the supply curve. The supply curve is derived from the supply schedule and plots the quantity supplied on the x-axis and the price on the y-axis. This graphical representation provides a visual understanding of the relationship between price and quantity supplied.

Importance:
The supply schedule is crucial in determining the equilibrium price and quantity in a market. It helps economists and market participants analyze the supply side of the market and make predictions about the behavior of suppliers. By studying the supply schedule, one can understand the responsiveness of suppliers to changes in price, the elasticity of supply, and the factors that influence producers' decisions to supply goods and services.

In conclusion, a supply schedule is a tabular representation of the quantity supplied at various prices. It provides valuable insights into the behavior of suppliers and helps in analyzing the supply side of the market. By examining the relationship between price and quantity supplied, one can understand the dynamics of supply and make predictions about market outcomes.

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).

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.

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.

Understanding Assertion (A) and Reason (R)
The question presents two statements: Assertion (A) and Reason (R), related to revenue expenditure and its purpose.
Assertion (A): Revenue Expenditure is incurred for the purpose of increasing the earning capacity of the business.
- This statement is false.
- Revenue expenditure refers to costs incurred for the day-to-day functioning of a business, aimed at maintaining its earning capacity rather than increasing it.
- Examples include costs for repairs, maintenance, and operational expenses.
Reason (R): Revenue expenditure can be easily defined as money spent for purchase or creating of long-term assets.
- This statement is also false.
- Money spent on purchasing or creating long-term assets is classified as capital expenditure, not revenue expenditure.
- Capital expenditures are intended to enhance the earning capacity of a business by acquiring or improving assets.
Conclusion
Given that both Assertion (A) and Reason (R) are incorrect, the correct answer is option 'B': Both Assertion (A) and Reason (R) are false.
- Revenue expenditure does not increase earning capacity; instead, it maintains it.
- Capital expenditure is what involves long-term asset creation or purchase.
Understanding these distinctions is crucial for accurate financial analysis and reporting in any business context.

When more units of a good or service can be produced on a larger scale, yet with (on average) fewer input costs, economies of scale are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs.

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.

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.

A subsidy occurs when the government pays a firm directly or reduces the firm's taxes if the firm carries out certain actions. From the firm's perspective, taxes or regulations are an additional cost of production that shifts supply to the left, leading the firm to produce a lower quantity at every given price.

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.

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.

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.

The correct answer is B

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.

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.

New technology: When a firm discovers a new technology that allows it to produce at a lower cost, the supply curve will shift to the right as well. ... A technological improvement that reduces costs of production will shift supply to the right, causing a greater quantity to be produced at any given price.

Assertion (A): Increasing returns to a factor is a short-run phenomenon.
Reason (R): Greater application of the variable factor ensures fully utilization of the fixed factor.

The correct answer is option B: Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).

Explanation:
To understand the relationship between increasing returns to a factor and the utilization of fixed and variable factors, let's first define these terms.

- Increasing returns to a factor: This concept refers to a situation where increasing the use of a particular input (factor of production) leads to a more than proportionate increase in output. In other words, it implies that the marginal product of the input increases as more of it is employed.

- Fixed factor: A fixed factor of production refers to an input that cannot be easily varied in the short run. For example, in the context of a factory, the size of the building and the machinery installed may be considered fixed factors.

- Variable factor: A variable factor of production is an input that can be easily adjusted in the short run to increase or decrease production. For example, labor can be considered a variable factor as it can be readily hired or laid off depending on the level of output required.

Now, let's analyze the Assertion (A) and Reason (R) given in the question.

Assertion (A): Increasing returns to a factor is a short-run phenomenon.

This assertion is true. Increasing returns to a factor typically occur in the early stages of production when additional units of a variable factor of production are added to a fixed factor. As more of the variable factor is employed, there is often an improvement in efficiency, specialization, and division of labor, leading to higher productivity and increasing returns.

Reason (R): Greater application of the variable factor ensures fully utilization of the fixed factor.

This reason is also true. When the variable factor is increased, it allows for the better utilization of the fixed factor. As more units of the variable factor are employed, the fixed factor is fully utilized, which leads to economies of scale and increased output.

However, Reason (R) does not provide a correct explanation of Assertion (A). The reason simply states that greater application of the variable factor ensures the full utilization of the fixed factor but does not explain why increasing returns to a factor is a short-run phenomenon.

In conclusion, both Assertion (A) and Reason (R) are true, but Reason (R) does not explain Assertion (A) correctly. Therefore, the correct answer is option B.

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.