Production Class 12 Economics Questions With Answers

PHPWord

Production (Economics-Class 11)

Multiple Choice Questions (MCQs)

In economics, "production" refers to:

a) The process of consuming goods and services.

b) The process of creating goods and services for satisfying human wants.

c) The exchange of goods and services in the market.

d) The distribution of income among factors of production.

Correct Answer: b) The process of creating goods and services for satisfying human wants.

A production function shows the technological relationship between:

a) Revenue and cost.

b) Inputs and outputs.

c) Demand and supply.

d) Price and quantity.

Correct Answer: b) Inputs and outputs.

The short run in production is a period where:

a) All factors of production are variable.

b) At least one factor of production is fixed.

c) No factors of production can be changed.

d) The firm can vary its plant size.

Correct Answer: b) At least one factor of production is fixed.

In the long run, a firm can:

a) Only vary its labor input.

b) Only vary its raw material input.

c) Vary all its factors of production.

d) Not change its level of output.

Correct Answer: c) Vary all its factors of production.

Total Product (TP) refers to:

a) The output per unit of variable input.

b) The additional output from one more unit of variable input.

c) The total volume of goods and services produced by a firm with a given set of inputs.

d) The average cost of production.

Correct Answer: c) The total volume of goods and services produced by a firm with a given set of inputs.

Marginal Product (MP) is defined as:

a) Units of Variable Input

TotalProduct

b) Change in Units of Variable Input

Change in Total Product

c) Units of Fixed Input

Total Product

d) Total Product - Average Product

Correct Answer: b)

Change in Units of Variable Input

Change in Total Product

Average Product (AP) is calculated as:

a) Total Product × Units of Variable Input

b) Marginal Product × Units of Variable Input

Units of Variable Input

Total Product

Change in Units of Variable Input

Change in Total Product

Correct Answer: c)

Units of Variable Input

Total Product

When Marginal Product (MP) is positive and increasing:

a) Total Product (TP) is decreasing.

b) Total Product (TP) is increasing at an increasing rate.

c) Total Product (TP) is increasing at a decreasing rate.

d) Total Product (TP) is at its maximum.

Correct Answer: b) Total Product (TP) is increasing at an increasing rate.

The Law of Variable Proportions operates in the:

a) Short run

b) Long run

c) Both short run and long run

d) None of the above

Correct Answer: a) Short run

When Marginal Product (MP) is zero, Total Product (TP) is:

a) Increasing

b) Decreasing

c) At its maximum

d) Negative

Correct Answer: c) At its maximum

If Average Product (AP) is increasing, then Marginal Product (MP) must be:

a) Less than AP

b) Equal to AP

c) Greater than AP

d) Zero

Correct Answer: c) Greater than AP

The stage of increasing returns to a factor is characterized by:

a) MP being greater than AP.

b) TP increasing at a diminishing rate.

c) MP being negative.

d) TP reaching its maximum.

Correct Answer: a) MP being greater than AP.

In the stage of diminishing returns to a factor:

a) MP is positive but decreasing.

b) TP is increasing at an increasing rate.

c) AP is falling but MP is rising.

d) MP is negative.

Correct Answer: a) MP is positive but decreasing.

When Total Product (TP) begins to fall, Marginal Product (MP) is:

a) Increasing

b) Decreasing

c) Zero

d) Negative

Correct Answer: d) Negative

Returns to scale refers to the changes in output when:

a) Only one input is varied.

b) All inputs are varied in the same proportion.

c) Input prices change.

d) Technology improves.

Correct Answer: b) All inputs are varied in the same proportion.

Which of the following is an example of a fixed factor in the short run?

a) Raw materials

b) Electricity

c) Land and factory building

d) Casual labor

Correct Answer: c) Land and factory building

If Total Product is 100 units with 5 units of variable input, the Average Product is:

a) 500 units

b) 20 units

c) 100 units

d) 5 units

Correct Answer: b) 20 units (

100

=20)

A production function describes the maximum output a firm can produce for every combination of:

a) Profits and losses.

b) Costs and revenues.

c) Inputs.

d) Demands.

Correct Answer: c) Inputs.

In the short run, the Law of Variable Proportions suggests that as more units of a variable factor are combined with fixed factors, output will initially:

a) Decrease, then increase.

b) Increase at an increasing rate, then a decreasing rate, then decrease.

c) Remain constant.

d) Only increase.

Correct Answer: b) Increase at an increasing rate, then a decreasing rate, then decrease.

The concept of "returns to scale" is applicable in the:

a) Short run, as some factors are fixed.

b) Long run, as all factors are variable.

c) Both short and long run.

d) Neither short nor long run.

Correct Answer: b) Long run, as all factors are variable.

Short Questions

1.Define production in economics.

Answer: In economics, production is the process of combining various material and immaterial inputs (factors of production) to create goods and services for satisfying human wants. It involves transforming inputs into outputs.

2.What is a production function?

Answer: A production function is a technological relationship that shows the maximum amount of output that can be produced from a given set of inputs (factors of production) during a specific period, given the existing state of technology.

3.Distinguish between the short run and the long run in production.

Answer: In the short run, at least one factor of production (e.g., plant size, machinery) is fixed, while others are variable (e.g., labor, raw materials). In the long run, all factors of production are variable, meaning the firm can change its plant size, technology, or any other input.

4.Define Total Product (TP).

Answer: Total Product (TP) refers to the total quantity of goods or services produced by a firm using a given amount of fixed and variable inputs during a specific period.

7.What is the relationship between MP and AP when AP is at its maximum?

Answer: When Average Product (AP) is at its maximum, Marginal Product (MP) is equal to Average Product (MP = AP).

8.When is Total Product (TP) at its maximum?

Answer: Total Product (TP) is at its maximum when Marginal Product (MP) is zero.

9.Briefly explain the 'stage of increasing returns' in the Law of Variable Proportions.

Answer: The stage of increasing returns occurs when, as more units of a variable factor are added to fixed factors, Total Product increases at an increasing rate, and both Marginal Product and Average Product are rising, with MP being greater than AP. This is often due to better utilization of fixed factors and specialization.

10.Give two examples of variable factors of production in a car manufacturing plant.

Answer: Two examples of variable factors in a car manufacturing plant are: labor (number of workers) and raw materials (steel, plastic, tires).

Long Questions (5 Marks each)

1. Explain the concepts of Total Product, Average Product, and Marginal Product. Illustrate their relationship using a hypothetical numerical example and discuss how they typically behave as more units of a variable input are added to a fixed input.

Answer:

Concepts:

Total Product (TP): This is the total quantity of output produced by a firm using a given amount of inputs (both fixed and variable) over a specific period. It's the overall yield from the production process.

Hypothetical Numerical Example:

Let's consider a firm with a fixed amount of capital (e.g., a factory) and varying units of labor (the variable input).

Units of Fixed Input (Capital)	Units of Variable Input (Labor)	Total Product (TP)	Marginal Product (MP)	Average Product (AP)
1	0	0	-	-
1	1	10	10	10
1	2	25	15	12.5
1	3	45	20	15
1	4	60	15	15
1	5	70	10	14
1	6	75	5	12.5
1	7	75	0	10.71
1	8	70	-5	8.75

Behavior and Relationships:

Phase 1: Increasing Returns to Factor (Labor = 1 to 3 units)

MP behavior: MP is increasing (10, 15, 20).

AP behavior: AP is increasing (10, 12.5, 15).

TP behavior: TP is increasing at an increasing rate.

Relationship: MP > AP. The additional unit of labor is more productive than the previous one, leading to increasing average productivity.

Phase 2: Diminishing Returns to Factor (Labor = 4 to 7 units)

MP behavior: MP is positive but decreasing (15, 10, 5, 0).

AP behavior: AP initially increases (at 4 units, AP=MP=15), then starts decreasing (14, 12.5, 10.71).

TP behavior: TP is increasing, but at a decreasing rate, reaching its maximum when MP is zero (at 7 units, TP is 75, MP is 0).

Relationship: MP < AP (when AP is falling). When MP = AP, AP is at its maximum (at 4 units of labor). This phase reflects the Law of Diminishing Returns, where after a certain point, adding more variable input to a fixed input yields less and less additional output.

Phase 3: Negative Returns to Factor (Labor = 8 units onwards)

MP behavior: MP becomes negative (-5).

AP behavior: AP continues to fall.

TP behavior: TP starts to decrease.

Relationship: MP is negative. Adding more variable input beyond the point of maximum TP actually reduces total output due to overcrowding, inefficiency, and management difficulties.

In summary, the relationship between TP, AP, and MP is crucial for understanding the short-run production decisions of a firm, governed by the Law of Variable Proportions.

2.Define a production function and differentiate between the short run and the long run in production theory. Why is this distinction crucial for a firm's decision-making process?

Answer:

Production Function:

A production function is a concise mathematical or technical relationship that specifies the maximum output that can be produced from any given combination of inputs (factors of production) during a specific period, given the existing state of technology. It represents the most efficient way to produce output using available technology. It can be expressed as:

Q=f(L,K,E,M,...)

Where Q = Quantity of Output; L = Labor; K = Capital; E = Entrepreneurship; M = Raw Materials; and 'f' denotes the functional relationship.

Short Run vs. Long Run in Production:

The distinction between the short run and the long run in production theory is not based on a specific calendar period (e.g., 6 months or 1 year) but rather on the flexibility of input usage.

Short Run:

Definition: A period of time in which at least one factor of production is fixed, while other factors are variable. The firm cannot change the scale of its operations (e.g., plant size, heavy machinery).

Fixed Factors: Inputs whose quantity cannot be changed in the short run (e.g., factory building, large machinery, land). Their cost is fixed cost.

Variable Factors: Inputs whose quantity can be changed in the short run to vary the level of output (e.g., labor, raw materials, electricity). Their cost is variable cost.

Law Applicable: The Law of Variable Proportions (or Law of Diminishing Returns) applies in the short run, as output changes are achieved by varying the proportion of variable input to fixed input.

Long Run:

Definition: A period of time sufficiently long enough for a firm to vary all its factors of production. There are no fixed factors in the long run. The firm can change its plant size, technology, or any other input.

Fixed Factors: None. All factors are variable.

Variable Factors: All factors (labor, capital, land, raw materials).

Law Applicable: The concept of Returns to Scale applies in the long run, as output changes are achieved by varying all inputs in the same proportion.

Cruciality of the Distinction for a Firm's Decision-Making:

This distinction is crucial for a firm's decision-making process because it influences:

Production Planning and Cost Analysis:

Short Run: Firms focus on optimizing output by adjusting variable inputs with their existing fixed capacity. Cost analysis involves distinguishing between fixed and variable costs, which impact short-run profit maximization and shutdown decisions. For instance, a firm might continue to produce in the short run even if it's making losses, as long as it covers its variable costs.

Long Run: Firms consider changing their entire scale of operations. All costs are variable, and decisions involve choosing the optimal plant size and technology to minimize long-run average costs and achieve long-run growth objectives.

Resource Allocation:

Short Run: Allocation decisions are constrained by fixed factors. The firm tries to make the best use of its existing plant and machinery by adjusting the intensity of variable inputs.

Long Run: Firms have complete flexibility in resource allocation. They can exit an industry, enter a new one, or significantly expand/contract operations by acquiring/selling capital assets.

Technological Choices:

Short Run: Technology is generally assumed to be fixed. Firms operate within the constraints of existing production methods.

Long Run: Firms can choose to adopt new technologies, invest in research and development, or completely overhaul their production processes to achieve greater efficiency or produce new products.

Profit Maximization:

The conditions for profit maximization differ between the short and long runs because of the presence of fixed factors and fixed costs in the short run. In the long run, firms aim to achieve the most efficient scale of operation.

In essence, the short run deals with operational adjustments within existing capacity, while the long run deals with strategic decisions related to capacity expansion, technology adoption, and overall scale of production. A firm must understand these time horizons to make effective decisions regarding resource utilization, cost management, and long-term growth.

3.State and explain the Law of Variable Proportions (or Law of Diminishing Marginal Returns) with the help of a numerical schedule. Identify and briefly describe its three stages.

Answer:

Law of Variable Proportions (or Law of Diminishing Marginal Returns):

The Law of Variable Proportions states that as more and more units of a variable factor (e.g., labor) are combined with a fixed factor (e.g., capital/land), the Total Product (TP) will initially increase at an increasing rate, then increase at a diminishing rate, and eventually, after a certain point, it may even decline. Consequently, the Marginal Product (MP) of the variable factor will first rise, then fall, and eventually become negative.

Assumptions of the Law:

Only one factor is varied, while others are kept fixed.

Units of the variable factor are homogeneous.

Technology remains constant.

The short run period of production.

Numerical Schedule Example:

Units of Fixed Factor (Land)	Units of Variable Factor (Labor)	Total Product (TP)	Marginal Product (MP) (TPn−TPn−1)	Average Product (AP) (LTP)	Stage of Production
1	0	0	-	-	-
1	1	10	10	10	Stage I
1	2	25	15	12.5	(Increasing Returns)
1	3	45	20	15
1	4	60	15	15	Stage II
1	5	70	10	14	(Diminishing Returns)
1	6	75	5	12.5
1	7	75	0	10.71
1	8	70	-5	8.75	Stage III
1	9	60	-10	6.67	(Negative Returns)

Explanation of the Three Stages:

Stage I: Increasing Returns to a Factor (Labor 1 to 3 units)

Behavior: In this stage, as more units of the variable factor (labor) are added to the fixed factor (land), Total Product (TP) increases at an increasing rate. Both Marginal Product (MP) and Average Product (AP) are rising. MP is greater than AP (MP > AP). MP reaches its maximum point in this stage (at 3 units of labor, MP=20).

Reasons: This stage occurs due to better utilization of the fixed factor. Initial additions of the variable factor allow for greater specialization of labor and more efficient use of the indivisible fixed factor. For instance, in a factory, one worker might be handling multiple tasks inefficiently; adding more workers allows for division of labor and specialized tasks, leading to higher productivity per additional worker.

Firm's Decision: A rational producer will not stop production in this stage because MP is still rising, indicating that there is potential to increase output more rapidly.

Stage II: Diminishing Returns to a Factor (Labor 4 to 7 units)

Behavior: In this stage, as more units of the variable factor are added, Total Product (TP) continues to increase, but now at a diminishing rate. Marginal Product (MP) starts to fall but remains positive. Average Product (AP) also starts to fall after reaching its maximum point (at 4 units of labor, AP=15). MP is less than AP (MP < AP) when AP is falling. This stage ends when MP becomes zero, and TP reaches its maximum (at 7 units of labor, MP=0, TP=75).

Reasons: This stage begins due to the Law of Diminishing Returns taking effect. The optimal proportion between fixed and variable factors has been crossed. The fixed factor is being used more intensively, but each additional unit of the variable factor contributes relatively less to total output because there is less of the fixed factor available for each additional unit of the variable factor to work with. Overcrowding, coordination problems, and decreasing returns to individual efficiency begin to appear.

Firm's Decision: A rational producer will operate in this stage. Specifically, they will typically operate somewhere within this stage, where MP is positive, and TP is still increasing. The exact point depends on factor prices.

Stage III: Negative Returns to a Factor (Labor 8 units onwards)

Behavior: In this stage, the Total Product (TP) starts to decline. Marginal Product (MP) becomes negative. Average Product (AP) continues to fall.

Reasons: This stage is characterized by excessive use of the variable factor in relation to the fixed factor. Adding more variable input actually hinders production because of severe overcrowding, management inefficiencies, and interference with existing operations. For example, too many workers in a small factory might get in each other's way, reducing overall output.

: A rational producer will never operate in this stage, as adding more variable input actually reduces total output, leading to higher costs and lower production.