Question

Complete the following table:

$\begin{array}{ccccc}\text{Output units}& \text{Average fixed cost (Rs)}& \text{Marginal cost (Rs)}& \text{Average variable cost (Rs)}& \text{Average cost (Rs)}\\ 1& 60& 20& -& -\\ 2& -& -& 19& -\\ 3& 20& -& 18& -\\ 4& -& 18& -& -\\ 5& 12& -& -& 31\end{array}$

OR

State whether the following statements are true or false. Give reasons for your answer: a. Under diminishing returns to a factor marginal product and total product both increase at a diminishing rate. b. When marginal cost rises, average cost also rises. c. Marginal revenue can never be negative.

Answer 1

$\begin{array}{ccccc}\text{Output units}& \text{Average fixed cost (Rs)}& \text{Marginal cost (Rs)}& \text{Average variable cost (Rs)}& \text{Average cost (Rs)}\\ 1& 60& 20& \underset{–}{20}& \underset{–}{20}\\ 2& \underset{–}{30}& \underset{–}{18}& 19& \underset{–}{49}\\ 3& 20& \underset{–}{16}& 18& \underset{–}{38}\\ 4& \underset{–}{15}& 18& \underset{–}{18}& \underset{–}{33}\\ 5& 12& \underset{–}{19}& \underset{–}{19}& 31\end{array}$

OR

a. False, because when MP falls, while TP increases at diminishing rate.

b. False because AC rises only when MC > AC.

c. False, because when a firm can sell more only by lowering the price it is possible that marginal revenue becomes negative after a level of output.