2nd PUC Economics Question Bank Chapter 3 Production and Costs

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Karnataka 2nd PUC Economics Question Bank Chapter 3 Production and Costs

2nd PUC Economics Production and Costs One Mark Questions and Answers

1. Choose The Correct Answer.

Question 1.
The Formula of production function is
(a) q=f(L, K)
(b) q = d (p)
(c) y = f (x)
(d) None of the above
Answer:
1. (a) q = f (L, K)

Question 2.
In the short run, a firm
(a) Can change all the inputs
(b) Cannot vary all the inputs
(c) Can keep the inputs fixed
(d) None of the above
Answer:
(b) Cannot vary all the inputs

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 3.
The change in output per unit of change in the input is called.
(a) Marginal product
(b) Average product
(c) Total product
(d) Product
Answer:
(b) Average product

Question 4.
Cobb – Douglas production function is
(a) q = (x, x)
(b) q = (x1, x2)
(c) q = (xt, x/)
(d) q=(0)
Answer:
(c) q = (xt, x/)

Question 5.
TC =
(a) TVC
(b) TFC
(c) TFC + TVC
(d) AC + MC
Answer:
(c) TFC + TVC

Question 6.
Let TR be total revenue, Q be quantity of output, and ‘n’ the number of units, then marginal revenue equals:
(a) TR<sub>n</sub> – TR<sub>n-1</sub> only
(b) Change in TR/Change in Q only
(c) Both (a) and (b)
(d) none of the above
Answer:
(c) Both (a) and (b)

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 7.
In phase I of the law of variable proportions, total product:
(a) Falls
(b) Becomes negative
(c) Increases at an increasing rate
(d) Decreases at a diminishing rate.
Answer:
(c) Increases at an increasing rate

Question 8.
The total cost of 5 units of output is ₹ 40. The fixed cost is ₹ 5. The average variable cost at 5 units of output is:
(a) ₹ 35
(b) ₹ 7
(c) ₹ 5
(d) ₹ 1
Answer:
(b) ₹ 7
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 15

Question 9.
Which of the following curve is not ‘U’ shaped?
(a) AFC
(b) AVC
(c) MC
(d) AC
Answer:
(a) AFC

Question 10.
The short run, as economists use the phrase, is characterized by
(a) at least one fixed factor of production and firms neither leaving nor entering the industry.
(b) a period where the law of diminishing returns does not hold
(c) no variable inputs – that is all of factors of production are fixed
(d) all inputs being variable.
Answer:
(a) at least one fixed factor of production and firms neither leaving nor entering the industry.

Question 11.
The economists, the main difference between the short run and the long run is that
(a) in the short run all inputs are fixed, while in the long run all inputs are variable.
(b) in the short run the firm varies all of its inputs to find the least-cost combination of inputs.
(c) in the short run, at least one of the firm’s input levels is fixed.
(d) in the long run, the firm is making a constrained decision about how to use existing plant and equipment efficiently.
Answer:
(b) in the short run the firm varies all of its inputs to find the least-cost combination of inputs.

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 12.
Which of the following is the best definition of “production function”?
(a) The relationship between market price and quantity supplied.
(b) The relationship between the firm’s total revenue and the cost of production.
(c) The relationship between the quantities of inputs needed to produce a given level of output.
(d) The relationship between the quantity of inputs and the firm’s marginal cost of production.
Answer:
(c) The relationship between the quantities of inputs needed to produce a given level of output.

Question 13.
Which of the following cost curves is never U’ shaped?
(a) Average cost curve
(b) Marginal cost curve
(c) Average variable cost curve
(d) Average fixed cost curve
Answer:
(d) Average fixed cost curve

Question 14.
Marginal cost is defined as
(a) the change in total cost due to a one unit change in output
(b) total cost divided by output
(c) the change in output due to a one unit change in an input
(d) total product divided by the quantity of input
Answer:
(a) the change in total cost due to a one unit change in output

Question 15.
Identify the fixed cost from the following
(a) Labour cost
(b) Electricity bill
(c) Salary of watchman
(d) Cost of raw materials
Answer:
(c) Salary of watchman

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 16.
Which of the following is not an assumption of the law of variable proportions
(a) only one factor is variable
(b) Technique of production remains constant
(c) Proportion of factors of production remains same.
(d) Units of variable factor are homogeneous.
Answer:
(c) Proportion of factors of production remains same.

Question 17.
In the long run
(a) all inputs are fixed
(b) all inputs are variable
(c) at least one input is variable and one input is fixed
(d) at most one input is variable and one input is fixed
Answer:
(b) all inputs are variable

Question 18.
Marginal cost changes due to changes In
(a) Total cost
(b) Average cost
(c) Variable cost
(d) Quantity oíoutput
Answer:
(c) Variable cost

Question 19.
When Total Product falls, then
(a) Average Product is equal to zero
(b) Marginal Product is equal to zero
(c) Marginal Product is negative
(d) Average Product continues to rise
Answer:
(c) Marginal Product is negative

Question 20.
Increasing returns is applicable because of
(a) Increased efficiency of variable factor
(b) fuller utilisation of fixed factor
(c) indivisibility of factors
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Question 21.
At the point of inflexion, the Marginal product Is
(a) increasing
(b) decreasing
(c) maximum
(d) negative
Answer:
(c) maximum

Question 22.
When Average cost curve is rising, the marginal cost
(a) must be decreasing
(b) must be constant
(c) must be rising
(d) Any of these
Answer:
(c) must be rising

Question 23.
As output increases, Average fixed cost
(a) remains constant
(b) starts falling
(c) starts rising
(d) None of these
Answer:
(b) starts falling

2nd PUC Economics Question Bank Chapter 3 Production and Costs

II. Fill in the Blanks

1. In the long run, all inputs are ______
Answer:
Variable

2. ______is defined as the out put per unit of variable input.
Answer:
Average Product

3. Marginal product and Average product curves are ______in shape.
Answer:
Inverse ‘U’

4. SMC curve cuts the AVC curve at the ______below point of AVC curve from
Answer:
Minimum

5. ______ is the set of all possible combinations of the two inputs that yield the same maximum possible level of out put.
Answers:
Iso-quanks

6. Function showing relationship between inputs and output is known as_________function.
Answer:
Production

7. When Total Product falls, then Marginal product is_________ .
Answer:
Negative

8. When MP = 0, TP is _________
Answer:
Maximum

9._________cost increases continuously with the increase in production.
Answer:
Variable

10. The _________ indicates the total volume of goods and services produced during a given period of time
generally a year
Answer:
Total product

11._________is defined as the output per unit of variable input.
Answer:
Average product

12. _________refers to additional good produced by addition unit of a variable factor.
Answer:
Marginal Product

13. An_________is the set of all possible combinations of two inputs (labour & capital) which yield same
maximum possible level of output.
Answer:
Isoquant

14. The costs involved in the long run are _________and _________.
Answer:
Long Run Average Cost (LAC) and Long Run Marginal Cost (LMC)

15. The point where the TP curve changes its direction from convex to concave is called the _________
Answer:
Point of inflexion.

2nd PUC Economics Question Bank Chapter 3 Production and Costs

III. Match the following

Question 1.

A B
1. CRS a. ∆TC/∆C
2. SAC b. Long Run Average Cost
3. LRAC c. Short Run Average Cost
4. TFC + TVC = d. Constant Returns to scale
5. SMC e. TC

Answers:

  1. (d) Constant Returns to scale
  2. (c) Short Run Average Cost
  3. (b) Long Run Average Cost
  4. (e) TC
  5. (a) ∆TC/∆C

Question 2.

A B
1. Short-run a. Diminishing Returns to Scale
2. Long-run b. TPn-TPn-1
3. Marginal product c. Fixed inputs and Variable inputs
4. DRS d. ‘U’ shaped
5. Marginal cost and AVC curves e. Variable inputs

Answer:

  1. c. Fixed inputs and Variable inputs
  2. e. Variable inputs
  3. b. TPn-TPn-1
  4. a. Diminishing Returns to Scale
  5. d. ‘U’ shaped

2nd PUC Economics Question Bank Chapter 3 Production and Costs

IV. Answer the following questions in a sentence/word.

Question 1.
What do you meant by Total product?
Answer:
This relationship between the variable input and output, keeping all other inputs constant, is often referred to as Total Product of the variable input. OR
The total product indicates the total volume of goods and services produced during a given period of time generally a year

Question 2.
What is Average product?
Answer:
Average product is defined as the output per unit of variable input. We can calculate it as follows: AP= Total Product/No, of units of a variable factor (or)
TP / L

Question 3.
Give the meaning of Marginal product.
Answer:
Marginal product of an input is defined as the change in output per unit of change in the i^iput when all other inputs are held constant.
OR
Marginal Product refers to additional good produced by addition unit of a variable factor. We obtain marginal product by using the following formula. MP = TPn– TPn-1

Question 4.
Write the meaning of cost function of the firm.
Answer:
Cost function shows the relationship between output and the cost of production. Cost function is expressed as:
C = f(Qx)
C = production cost, f= functional relationship, Qx = quantity produced of x goods
The cost function depicts the least cost combination of inputs associated with different output levels.
The cost function depicts the least cost combination of inputs associated with different output levels.

Question 5.
What is total fixed cost.
Answer:
The cost that a firm incurs to employ fixed inputs is called the total fixed cost (TFC).

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 6.
What is average fixed cost?
Answer:
The average variable cost (AVC) is defined as the total variable cost per unit of output. AVC = TVC/q

2nd PUC Economics Production and Costs Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
What is Isoquant?
Answer:
An Isoquant is the set of all possible combinations of two inputs (labour & capital) which yield
same maximum possible level of output.

Question 2.
Give the meaning of the concepts of short run and long run.
Answer:
Short Run: In the short run, a firm cannot vary all the inputs. One of the factors – factor 1 or factor 2 – cannot be varied, and therefore, remain fixed in the short run. In order to vary the output level, the firm can vary only the other factor. The factor that remains fixed is called fixed input whereas the other factor which the firm can vary is called the variable input.

Long Run: In the long run, all factors of production can be varied. A firm in order to produce different levels of output in the long run may vary both the inputs simultaneously. So, in the long run, there is no fixed input.

Question 3.
Mention the types of Returns to scale.
Answer:
The three types of returns to scale are:
Increasing returns to scale; Constant returns to scale; Diminishing returns to scale

Question 4.
Name the short run costs.
Answer:
The costs involved in the short-run are:
Total fixed cost; Total variable cost; Average fixed cost; Average variable cost

Question 5.
What are long run costs?
Answer:
The costs involved in the long run are:
Long Run Average Cost (LAC); Long Run Marginal Cost (LMC)

2nd PUC Economics Question Bank Chapter 3 Production and Costs

2nd PUC Economics Production and Costs Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Explain Isoquant with the help of the diagram.
Answer:
An isoquant is the set of all possible combinations of the two inputs that yield the same maximum possible level of output. Each isoquant represents a particular level of output and is labeled with the amount of output.
In the above diagram, on OX axis we measure Labour and on OY axis we measure Capital. We have three isoquants for the three output levels, namely q = q1,
q = q2, q = q3.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 1

Two input sombinations (L1, K2) and (L2, K1) give us the same level of output q1. If we fix capital at K1 and increase labour to L3, output increases and we reach a higher isoquant, q=q2.

When marginal products are positive, with greater amount of one input, the same level of output can be produced only using lesser amount of the other. Therefore, isoquants are negatively sloped.

Question 2.
Explain TP, MP and AP with the examples.
Answer:
The concept of total product, marginal product and average product can be explained with the help of table,
Total Product: The relation between the variable input and output, keeping all other inputs constant, is often referred to as Total Product (TP) of the variable input. As illustrated in the table, total product by 4 units of labour are 50 units.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 2
Marginal Product: Marginal product of an input is defined as the change in output per unit of change in the input! when all other inputs are held constant. When capital is held constant, the marginal product of labour is

2nd PUC Economics Question Bank Chapter 3 Production and Costs - 3

For example, when L changes from 1 to 2, AT changes from 10 to 24.
MPL =(TPL – TPL-1
Here, Change in TP = 24-10=14
Change in L = 1
Marginal product of the 2nd unit of labour = 14/1=14
Average Product: Average product is defined as the output per unit of variable input. We calculate it as
APL = \(\frac{\mathrm{TP}_{\mathrm{L}}}{\mathrm{L}}\)
As illustrated in the table, Average product produced by 4 units of labour is 12.5 which is calculated by
APL = \(\frac{\mathrm{TP}_{\mathrm{L}}}{\mathrm{L}}\)
Hence , AP = 50/4 = 17.5

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 3.
Write a brief note on returns to scale.
Answer
Meaning: Laws of returns to scale explain the physical relationship between input and output in the long run. It explains the behavior of output when quantities of all input are changed in same proportion.
This law is dependent of Long run production analysis where all the factors of production are variable in nature.

Stages of returns to scale: The law operates in three stages when the output changes in same proportion.

  1. Increasing returns to scale
  2. Constant returns to scale
  3. Diminishing returns to scale

1. Increasing returns to scale: When the output increases by a greater proportion than the proportion on increase in all the factors, increasing returns to scale operates.
For example, if 100% increase in the inputs by firm results in 100% increase in outputs, it is a case of increasing returns to scale.

2. Constant returns to scale: It happens when output increases by the same proportion as that of increase in inputs.

3. Diminishing returns to scale: this stage operates when output increases less than the proportion of inputs. For example 100% increase in all factor inputs results in only 80% increase in output.

Question 4.
Explain the long run costs.
Answer:
All factors are variable in the long run. Hence, there is no total fixed cost or average fixed cost curves in the long run. Long run average cost (LRAC] is defined as cost per unit of output, LRAC = TC/q-
Long run marginal cost (LRMC) is the change in total cost per unit of change in output.
LRAC and LRMC curves are ‘U’ shaped and LRMC curve cuts the LRAC from below at its minimum point. The operation of law of returns to scale is the reason for TJ’ shape of LRAC curve.
LRAC and LRMC curves are represented in diagram.

The diagram shows the shapes of the long run marginal cost and the long run average cost curves for a typical firm. LRAC reaches its minimum at q<sub>1</sub> . To the left of q<sub>1</sub> , LRAC is falling and LRMS is less than the LRAC curve. TO the right of q<sub>1</sub>, LRAC is rising and LRMC is higher than LRAC.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 4

Question 5.
The following table gives the TP schedule ofiabour. Find the corresponding aver age product and marginal product schedules.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 5
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 6

Question 6.
Mention any four short-run costs.
Answer:
The costs involved in the short-run are:
Total fixed cost
Total variable cost
Average fixed cost
Average variable cost

Question 7.
The following table gives the total product schedule of labour. Find the corresponding average product and marginal product schedules of labour.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 37
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 16

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 8.
The following table gives the average product schedule of labour. Find the total product and marginal product schedules. It is given that total product is zero at zero level of labour employment.|
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 17
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 18

Question 9.
The following table gives the marginal product schedule of labour. It is also given that product of labour is zero at zero level of employment. Calculate the total and average product schedules of labour.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 19
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 20

Question 10.
From the following information about a firm, calculate average product and Marginal product.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 21
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 22

Question 11.
Calculate Total Product and Marginal product of a firm, if its average product is as under:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 23
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 24

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 12.
Complete the following table:
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 25
HINTS: (1) First find out TFC and TVC and apply the formula to find out the missing costs (2) TFC is 30 (3) Formula to find out TVC is TVC = TC – TFC

Question 13.
The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm? Calculate the TVC, AFC, AVC, SAC and SMC Schedules of the firm.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 26
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 27

Question 14.
The following table gives the total cost schedule of a firm. It is also given that the aver age fixed cost at 4 units of output is ₹ 5. Find the TVC, TFC, AVC, AFC, SAC and SMC schedules of the firm for the corresponding values of output.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 28
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 29

Question 15.
A firm’s SMC schedule is shown in the following table. The total fixed cost of the firm is ? 100. Find the TVC, TC, AVC and SAC schedules of the firm.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 30
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 31

Question 16.
The following table shows the total cost schedule of a firm. Calculate TVC, TC, AFC, AVC, AC and MC. (FOR PRACTICE ONLY)
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 32

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 17.
Complete the following table:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 33
Answer:
First find out TFC, TVC and TC. if AFC is 60 then TFC will be 60.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 34
At output level 1 MC = TVC = AVC so TVC for output level 1 is 20

Question 18.
Complete the cost schedule given below:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 35
Answer:
HINTS has been provided for calculating the missing costs.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 36
At output level 1 MC = TVC = AVC so TVC for output level 1 is 20

2nd PUC Economics Production and Costs Six Marks Questions and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the various short run costs with the help of a table.
Answer:
The following are the short run costs

1. Total Fixed Cost: In the short run, some of the factors of production cannot be varied, and therefore, remain fixed. The cost that a firm incurs to employ these fixed inputs is called the total fixed cost (TFC). It does not change with the change in the level of output.

2. Total Variable Cost: To produce any required level of output, the firm, in the short run, can adjust only variable inputs. Accordingly, the cost that a firm incurs to employ these variable inputs is called the total variable cost (TVC).

3. Total Cost: Total cost includes both total fixed and total variable costs.
Total cost can be written as TC=TFC +TVC.

4. In order to increase production of output, the firms must employ more of the variable inputs. As a result, total variable cost and total cost will increase. 4. Average Fixed Cost: It refers to the per unit fixed cost of production of a commodity. It can be obtained as follows: AFC = TFC / q

5. Average Variable Cost: It is defined as the total variable cost per unit of output. We calculate it as AVC = TVC / q

6. Short Run Average Cost: It is the per unit total cost of production. It can be obtained by dividing the total cost by the number of units produced. So, SAC = TC/q or SAC = AVC + AFC.

7. Short Run Marginal Cost: It refers to the cost incurred on production one more unit of a commodity. It can be obtained as follows:

MC = TCn – TCn-1
Various Concepts of Costs
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 7
It is important to note that, in the short run, fixed cost cannot be changed. When we change the level of output, whatever change occurs to the total cost is entirely due to the change in TVC.
So, in the short run, MC is the increase in TVC due to increase in production of one extra unit of output.

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 2.
Explain the shapes of long run cost curves.
Answer:
The long run cost curves shapes can be explained as follows:
Increasing returns to scale (IRS) implies that if we increase all the inputs by a certain proportion, output increases by more than that proportion. With the input prices given, cost also increases by a lesser proportion. As long as IRS operates, the LRAC and LRMC decrease initially. Constant returns to scale (CRS) implies a proportional increase in inputs resulting in a proportional increase in output. So the LRAC remains constant as long as CRS operates. Diminishing returns to scale (DRS) implies that if we want to increase the output by a certain proportion, inputs need to be increases by more than that proportion. As a result, cost also increases by more than that proportion. So, as long as DRS operates, the LRAC increases.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 8
LRAC and LRMC curves are ‘U’ shaped and LRMC curve cuts the LRAC from below at its minimum point.
The operation of law of returns to scale is the reason for TJ’ shape of LRAC curve.
LRAC and LRMC curves will be more flat than SAC and SMC. LRAC, LRMC and SMC decreases initially and later increases. Again their centre would be more flat.
LRAC and LRMC curves are represented in diagram.

The diagram shows the shapes of the long run marginal cost and the long run average cost curves for a typical firm.
LRAC reaches its minimum at qr To the left of qt, LRAC is falling and LRMS is less than the LRAC curve. TO the right of qx, LRAC is rising and LRMC is higher than LRAC.

Question 3.
Explain the shapes of TP, MP and AP curves.
Answer:
Total Product: An increase in the amount of one of the inputs keeping all other inputs constant results in an increase in output. The total product curve in the input-output plane is a positively sloped curve.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 9
In the above diagram on OX axis we measure Labour and on OY axis we measure Output. With L units of labour, the firm can at most produce units of output.
According to the law of Variable proportions, the marginal product of an input initially rises and then after a certain level of employment, it starts falling. The MP curve therefore, looks like an inverse ‘U’ – shaped curve which is shown in the below diagram.

Let us now see what the AP curve looks like. For the first unit of the variable input, one can 1 easily check that the MP and the AP are same. Now as we increase the amount of input, the MP rises, and AP also rises but less than the MP. Then, after a point, the MP starts falling. So AP curve is also inverse ‘IT- shaped curve which is shown in the below diagram.
The above diagram shows the shapes of AP and MP curves for a firm. The AP of factor 1 is ‘ maximum at L. to the left of L, AP is rising and MP is greater than AP. to the right of L, AP is falling and MP is less than AP.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 10

A Firms SMC schedule is shown in the following table. TFC is ? 100. Find TVC, TC, AVC & SAC schedules of the firm.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 11
Answer:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 12

2nd PUC Economics Question Bank Chapter 3 Production and Costs

Question 5.
Explain the law of variable proportions with the help of a diagram.
Answer:
Law of Variable Proportions :
Meaning: The law of variable proportion explains the relationship between proportion of fixed input and variable input on the one hand and output on the other.

Explanation: In the short period, if a firm wants to expand its production, it can do so by increasing its variable factors and keeping the fixed factor as constant. As a result, the proportion between fixed and variable factors gets changed. Such a situation is called the law of variable proportions.
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 13
Diagrammatical Representation:
2nd PUC Economics Question Bank Chapter 3 Production and Costs - 14

In the above diagram on OX axis we measure Labour and on OY axis we measure Output. Notice that TP increases as labour input increases. But the rate at which it increases is not constant. An increase in labour from 1 to 2, TP increases by 10 units. An increase in labour from 2 to 3, TP increases by 12 units. The rate at which TP increases, as explained above, is shown by the MP. Notice that the MP first increases upto 3 units and then begins to fall. This tendency of the MP is called Law of Variable Proportions.

As we hold one factor fixed and keep increasing the other, the factor proportions change. Initially, if we increase the variable input, the factor proportions become more and more suitable for the production and MP increases. But after a certain level of employment, the production process becomes too crowded with the variable input so the output added by each additional worker will be less and MP will start falling.

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