question_answer

State whether the following statements are true or false. Give reasons.

(i) When there are diminishing returns to a factor. Marginal Product and Total Product born diminishes.

(ii) When Marginal Revenue (MR) is positive and constant, Average Revenue (AR) and Tom Revenue (TR) both will increase at constant rate.

(iii) As output is increased, the difference between Average Total Cost (ATC) and Average Variable Cost (AVC) falls and ultimately becomes zero.

Or State whether the following statements are true or false. Give reasons.

(i) As output increases. Average Cost (AC) tends to be closer to Average Variable Cost (AVC

(ii) Average Cost (AC) is more consistent than Marginal Cost (MC).

(iii) When Marginal Revenue (MR) is zero, Average Revenue becomes maximum.

Answer:

 (i) The statement is false. When there are diminishing returns to a factor, Marginal Product diminishes but Total Product increases at a diminishing rate. (ii) The statement is false. When Marginal Revenue (MR) is positive and constant, Total Revenue (TR) increases at a constant rate AR tends to be equal to MR. i.e. remain constant. (iii) The statement is false. As output increases, the difference between Average Total Cost (ATC) and Average Variable Cost (AVC) falls but can never be zero. The difference is equal to Average Fixed Cost (AFC) which remains positive, even when it is falling.                          Or (i) The statement is true. We know that AC = AFC + AVC. As output increases, AFC continuously fall, because TFC is constant consequently, the component of AFC in AC tends to shrink. This brings AC closer to AVC. (ii) The statement is true. AC is more consistent because it is not directly affected by the law of Variable proportion. On the other hand, MC is directly affected by law of variable proportion due to which it is narrow 'U' shaped curve whereas, AC curve is wide 'U' shaped curve. (iii) The statement is false. When Marginal Revenue is zero, Average Revenue will be diminishing.