Beruflich Dokumente
Kultur Dokumente
Q.1
Short run is a period of time in which at least one input is fixed. Therefore, if a producer wants to
increase his output he can only change the variable input of production.
The following table shows short run cost curves. Column (1) shows unit of output (Q) while column 2
shows fixed cost of production in rupees. Fixed or supplementary cost (FC) is the cost which does not
change with the change in output e.g. rent of land, interest on capital etc. Hence, it remains Rs. 10
whether the output is 0 or maximum i.e. 6 units. Column (3) shows variable or prime cost (VC) which
changes with the change in output e.g. cost of raw material, wages of labour etc. Column (4) shows total
cost which is the summation of fixed cost and variable cost. Column (5) shows average fixed cost
(AFC) or per unit fixed cost. Average fixed cost decreases from Rs 10 to Rs 5 and so on. This shows
that fixed cost is thinly distributed over number of units. Average variable Cost (AVC) means per unit
variable cost.
Column (7) shows average cost (AC) or average total cost which is per unit cost.
TC
AC = or AC = ACF + AVC
Q
Column (8) shows marginal cost (MC) of the production. Marginal cost is the additional cost incurred on
an additional unit of output.
TC
MC =
Q
Units of F.C (Rs.) V.C (Rs.) T.C (Rs.) A.F.C (Rs.) A.V.C (Rs.) A.C (Rs.) M.C (Rs.)
output (Q)
(1) (2) (3) (4) (5) (6) (7) (8)
0 10 0 10 - - - -
1 10 8 18 10 8 18 8
2 10 14 24 5 7 12 6
3 10 17 27 3.3 5.7 9 3
4 10 22 32 2.5 5.5 8 5
5 10 30 40 2 6 8 8
6 10 44 54 1.6 7.3 9 14
Relationship between AC, AVC and MC:
(i) When the average cost and average variable cost are falling, marginal cost lies below them. Since,
the additional cost incurred on every additional unit of output decreases, it pulls down the average
cost and average variable cost.
(ii) When the average cost and average variable cost are minimum, marginal cost is equal to them.
(iii) When the average cost and average variable cost are rising, the marginal cost is above them.
When the diminishing return sets in, the marginal cost will increase. Since, the additional cost
incurred on every additional unit of output increases, the average cost and average variable cost
will increase.
Q.2 (a)
Quantity Price Total revenue Marginal revenue Total cost Marginal cost Profit
sold (Rs) (Rs) (Rs) (Rs) (Rs)
1 34 34 34 12 12 22
2 30 60 26 20 8 40
3 27 81 21 34 14 47
4 25 100 19 53 19 47
5 23 115 15 75 22 40
6 21 126 11 102 27 24
7 19 133 7 131 29 2
Q.2 (b)
The profit maximizing level of output is 4th unit where MC is equal to MR and profit is maximum, i.e Rs
47.
Q.3 (a)
A monopoly firm has following advantages:
(i) Economies of scale: All the advantages of large scale firm are the advantages of monopoly which
are also called as economies of scale.
(ii) International competitiveness: Economies of scale at home enables monopoly to be able to
compete internationally.
(iii) Economic profit: Being a large scale firm without competitors, a monopoly always earn super
normal profit.
The following are the disadvantages of monopoly:
(i) High price: A monopoly producer charges higher price because he has no competitor in the
market. This policy of a monopolist is against a consumer.
(ii) Excess capacity: A monopoly firm always has an excess capacity. It does not produce at its
optimum level as a perfectly competitor firm does.
(iii) Productive inefficiency: A monopoly firm will be productively inefficient when it does not produce
at minimum average cost. Hence monopoly always charges higher price, produces less than the
competitive firm and is productively inefficient.
(iv) Stifle competition: By erecting various barriers against new entrant, a monopoly stifles
competition which is harmful for consumer.
(v) Supernormal profit: A monopoly firm always earns supernormal profit in long-run.
(vi) Price discrimination: A monopoly firm charges differentiated prices of the same product which is
against the interest of the consumers.
Q.3 (b)
Price discrimination means charging different prices of the same product or same price of the different
products, e.g. telephone calls, electricity rates, railway fare etc.
Q.4 (b)
The following schedule shows the possible data of a monopoly firm. A monopolist will be in equilibrium
at a point where:
Q.6