Short Questions With Answers - Production And Costs

Q.1. Define Marginal Physical Product.
Ans. Marginal Physical Product (MPP), also called Marginal Product (MP), is the change in total output (Total Physical Product) that results from employing one additional unit of a variable input, holding other inputs constant. It can be expressed as MPP = ΔTP / ΔL, where ΔTP is the change in total product and ΔL is the change in the variable input.
Q.2. What is meant by Total Physical Product?
Ans. Total Physical Product (TPP) or Total Product (TP) is the total quantity of output produced by a firm using its inputs in a given period. It shows the overall production resulting from the combination of inputs used.
Q.3. How is Total Product derived from the Marginal Product schedule?
Ans. Total Product is obtained by adding the Marginal Product of each unit of the variable input. In other words, the TP at the nth unit of the variable input equals the sum of MP of the 1st to nth units: TPn = Σ MPi (i = 1 to n). For example, if MPs for units 1-3 are 4, 5 and 3 respectively, TP after 3 units = 4 + 5 + 3 = 12.
Q.4. What will you say about the Marginal Product of a factor when Total Product is falling?
Ans. When Total Product is falling, the Marginal Product is negative. This is because MP measures the change in TP; if TP decreases as an additional unit of the variable factor is employed, the change (MP) is less than zero.
Q.5. What is the general shape of the MP curve?
Ans. The Marginal Product curve is generally an inverted U-shaped curve. It rises initially as additional units of the variable factor raise productivity, reaches a maximum, and then falls due to diminishing marginal returns.
Q.6. What is the general shape of the AP curve?
Ans. The Average Product (AP) curve is also generally inverted U-shaped. It increases initially, attains a peak where average productivity is highest, and then declines as the law of diminishing marginal returns sets in.
Q.7. Explain the likely behaviour of Total Product and Marginal Product when only one input is increased while all other inputs are kept unchanged.
Ans. The Law of Variable Proportions describes this behaviour when one input is varied and others are fixed. The typical pattern has three phases:
(i) Phase I - Increasing Returns: TP increases at an increasing rate and MP rises. Additional units of the variable factor make better use of the fixed factor, so output grows faster.
(ii) Phase II - Diminishing Returns: TP continues to increase but at a decreasing rate; MP declines though it remains positive. Here each extra unit adds less to output than the previous unit.
(iii) Phase III - Negative Returns: TP starts to fall and MP becomes negative. Over-utilisation of the fixed factor causes total output to decline when more units of the variable factor are added.

Q.8. What do 'returns to scale' refer to?
Ans. Returns to scale refer to the change in output in the long run when all factors of production are varied proportionately. They show how output responds when the scale of production is increased: increasing, constant or decreasing returns to scale may result.
Q.9. List any three inputs used in production.
Ans. Inputs used in production include:
(i) Land
(ii) Labour
(iii) Capital
Q.10. What is the Law of Variable Proportions?
Ans. The Law of Variable Proportions states that as more units of a variable factor are employed with other factors held constant, the Total Product first increases at an increasing rate, then increases at a diminishing rate, and finally begins to fall. This pattern reflects changing marginal returns to the variable factor.
Q.11. Define returns to a factor.
Ans.  Returns to a factor refer to the effect on output when the quantity of a variable factor is changed while other factors remain fixed. They indicate how additional units of that factor change total and marginal product.
Q.12. Give meaning of 'returns to scale'.
Ans. Returns to scale examine the change in output when all inputs are increased proportionately in the long run. If output rises by a greater proportion, there are increasing returns to scale; if by the same proportion, constant returns; if by a smaller proportion, decreasing returns.
Q.13. When does a production function satisfy decreasing return to scale?
Ans. A production function shows decreasing returns to scale when a given percentage increase in all inputs leads to a smaller percentage increase in output. For example, doubling all inputs increases output by less than twice.
Q.14. Give the meaning of increasing returns to scale.
Ans. Increasing returns to scale occur when a proportional increase in all inputs leads to a more than proportional increase in output. For example, doubling all inputs more than doubles output.
Q.15. Give the meaning of constant returns to scale.
Ans. Constant returns to scale occur when a proportional increase in all inputs leads to the same proportional increase in output. For example, doubling all inputs doubles output.
Q.16. What is meant by returns to a factor? What leads to increasing returns to factor? Explain.

Ans. Returns to a factor mean the change in Total Product when one variable factor is increased while other factors are kept constant.
Increasing returns to a factor arise when the Marginal Product of the variable factor increases as more units are employed. In this case, Total Product rises at an increasing rate. For example, if successive marginal products are 2, 4 and 6, the TP increases by ever larger amounts as more units are added. This situation is usually due to better utilisation of the fixed factor, improved division of labour, or more efficient combination of inputs.

In the table, marginal product rises with each additional unit of the variable factor; hence TP increases at an increasing rate and increasing returns to the factor prevail.
Q.17. What is meant by decreasing returns to factor? Give causes of its application.
Ans. Decreasing returns to a factor (also called diminishing marginal returns) means that, with other inputs held fixed, each additional unit of the variable factor adds less to total output than the previous unit. After a certain point, Marginal Product falls.
Following are the causes of diminishing marginal returns to a factor:
(i) Fixity of Factors: When a fixed factor is combined with more units of a variable factor, the fixed factor becomes over-utilised. This reduces the additional output obtained from each extra unit of the variable factor.
(ii) Imperfect Substitution: Factors are not perfect substitutes. Beyond a limit, it is not possible to replace the fixed factor sufficiently by the variable factor, so additional units contribute less to output.
(iii) Scarcity of Factors of Production: Some factors are limited in supply. As production expands, these limited factors become constraints, raising costs and reducing the marginal product of added variable inputs.
Q.18. What is Fixed Costs?
Ans. Fixed Costs (FC) are expenses that do not change with the level of output in the short run. They arise from employing fixed inputs and remain constant for all output levels (e.g., rent, insurance).
Q.19. Define Variable Costs.
Ans. Variable Costs (VC) are costs that vary with the level of output. They are incurred on variable factors and increase (or decrease) as production expands (or contracts), for example raw materials and wages of casual labour.
Q.20. What does cost mean in economics?
Ans. In economics, cost refers to the total expenditure incurred by a firm in producing a good or service. It includes both actual monetary payments and imputed costs (the value of resources owned by the firm used in production).
Q.21. Give meaning of 'opportunity cost'.
Ans. Opportunity cost is the value of the next best alternative foregone when a choice is made. It measures the benefit lost by not choosing the next best option.
Q.22. What is meant by real cost?
Ans. Real cost is the overall cost of producing a commodity measured by the sacrifices made (resources used) to produce it. It emphasises the real resources consumed rather than only monetary payments.
Q.23. Why is Average Total Cost greater than Average Variable Cost?
Ans. Average Total Cost (ATC) is greater than Average Variable Cost (AVC) because ATC is the sum of AVC and Average Fixed Cost (AFC). That is, ATC = AFC + AVC. Since AFC is always positive at any finite level of output, ATC > AVC.
Q.24. How does Average Fixed Cost behave as output is increased?
Ans. Average Fixed Cost (AFC) declines as output increases because the same fixed cost is spread over a larger number of units. AFC approaches zero as output becomes very large, but it never becomes exactly zero.
Q.25. Give two examples of Fixed Costs.
Ans. Examples of Fixed Costs include:
(i) Rent of factory or office premises
(ii) Salaries of permanent employees
Q.26. Give two examples of Variable Costs.
Ans. Examples of Variable Costs include:
(i) Purchase of raw materials
(ii) Wages of casual labour
Q.27. Distinguish between Fixed Costs and Variable Costs. Give two examples of each.
Ans. Following are the main points of difference between Fixed Cost and Variable Cost:

• Meaning: Fixed Costs do not change with output in the short run; Variable Costs change directly with the level of output.
• Behaviour with Output: FC remains constant; VC rises as output rises.
• Per Unit Effect: AFC (per unit fixed cost) falls as output increases; AVC may rise or fall depending on production conditions.
• Examples: Fixed Costs - rent, salaries of permanent staff. Variable Costs - raw materials, wages of casual labour.