ATUL KANT PGEMP33/A/23

23/07/Week-2/ME Micro Economics

1. The correct option is (a). A decrease in the productivity of the labour. We consider Labour as a variable phenomena , the fall in productivity shall lead to fall in marginal product and hence increase in marginal cost. When the marginal cost changes , variable cost will also change in the same direction. Hence the fall in productivity will lead to shift in firms average variable cost curve upward. 2. The correct option is (c) , Variable Costs are costs that change with the level of production. When we refer change in the variable costs , we actually refer to the total variable cost at different activity levels which for every output level will vary . This happens because the input consumption (relative to an output) to produce a final or intermediate product keeps rising for every output which is added. Hence , variable costs is associated with the production/ output levels. The correct option is (d) , a workers wage of Rs. 20 per day. A fixed cost is one that dont change in response to changes in activity levels. Fixed costs remain fixed / constant in total . In option (a) , (b) and (c) , there is annual fixed commitment for the cost . Option (d) remains flexible considering that wages are paid to the workers on per day basis , hence the variable cost will depend solely on the no. of days of the activity as against the annual fixed commitment.

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4. The correct option is (c) , of the law of diminishing returns. Marginal cost eventually increases as output increases , because of diminishing marginal product. Marginal product falls with output , marginal cost rises with output. 5. The correct option is (c) , long run average total cost curve is typically U shaped . Scale economies and returns to scale generally produce a U shaped long run average cost curve. For relatively small quantities of output , the curve is negatively sloped . Then for large quantities , the curve is positively sloped. The negatively sloped portion of the long run average cost curve reflects economies of scale and increasing returns to scale. The positively sloped portion reflects diseconomies of scale or decreasing returns to scale.

6. The correct choice is Curve 2 . Average total cost curve is U shaped . It is high at low outputs , because of the presence of the fixed costs. It is high at high outputs , because of diminishing marginal product of labour. Fixed Cost curve slopes negatively towards right (curve 4) ,as the cost is spread over larger number of units . Marginal cost curve is also U shaped (Curve 1) but it initially falls , reaches a minimum value and then increases . The marginal cost curve intersects both the average variable cost curve and average total cost curve. AVC behaves in the same direction as MC but doesnt intersect. 7. If the marginal cost of production is increasing , the incremental cost will get added to the total variable cost and hence average variable cost will also increase. Under such a scenario , the slope of marginal cost will be steeper when it rises than the average variable cost curve . This happens because average variable cost is calculated on the total output with incremental marginal cost getting spread over larger (total) volume while marginal cost increase shall be for the specific output range. 8. Average total cost is equal to sum average variable cost and average fixed costs. If we plot the graph , the difference between total cost and average variable cost is nothing but the average fixed cost . If the average fixed is greater than zero , the minimum average variable cost shall certainly be lower than minimum of average total cost. Besides, average fixed cost continues to fall with higher production , will also cause the fall in average total cost even after average variable reaches to its minimum level , because the drop in average fixed cost exceeds average variable cost. Finally , the fall in fixed cost becomes a small number and rise in average variable cost (due to fall in marginal product) causes average total cost to start rising .