question_answer

Giving reasons, state whether the following statements are true or false:

(i) Average product will increase only when marginal product increases.

(ii) With increase in level of output, average fixed cost goes on falling till it reaches zero.

(iii) Under diminishing returns to a factor, total product continues to increase till marginal product reaches zero.

Answer:

(i) False, the average product does not only rise when the marginal product increases. But, there also exist a region where average product continues to rise corresponding to the falling marginal product. This can be explained with the help of the following diagram.

As we can see in the region AB, the average product continues to rise even when the marginal product is falling. The reason behind this can be attributed to the fact that the marginal component always change (rise/fall) at a faster rate in contrast to the average component.

(ii) False, with increase in the level of output, the average fixed cost continues to fall but it never reaches zero because average fixed cost is a rectangular hyperbola. That is, it can never be zero. This can be explained with the help of the following diagram.

As we can see that the average fixed cost being a rectangular hyperbola tends to be zero, but however, it can never be zero.

(iii) True, under diminishing returns to a factor, total product continues to increase till marginal product reaches zero. This can be explained with the help of the following diagram.

As we can see from the above figure, the total product continues to increase till the marginal product reaches zero. This is because from the point I till the point B as more and more labour inputs are combined with the constant level of fixed factor, it leads to the fuller utilization of the fixed factor. Consequently, the marginal product of the additional labour units falls, whereas, TP continues to rise. The moment, where, the MP of the last labour unit becomes exactly equal to zero, then the TP reaches its maximum point.