Class 12 Microeconomics Chapter 3 Important Questions – Production and Costs
Production and Costs explains how firms combine inputs to produce output and how their costs change at different levels of production.
These Class 12 Microeconomics Chapter 3 Important Questions cover production functions, TP, AP, MP, the law of variable proportions, returns to scale, short-run costs, long-run costs and numerical problems.
Key Takeaways
- A production function shows the maximum output possible from different input combinations.
- In the short run, at least one input is fixed, while all inputs are variable in the long run.
- Marginal product initially rises and later falls under the law of variable proportions.
- Total cost is the sum of total fixed cost and total variable cost.
- Marginal cost cuts average cost and average variable cost at their minimum points.
Access Class 12 Microeconomics Chapter 3 Important Questions in 30 Minutes
- First 10 minutes: Production function, short run, long run, TP, AP and MP
- Next 10 minutes: Law of variable proportions and returns to scale
- Final 10 minutes: Cost concepts, cost curves and numerical questions
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Multiple Choice and Very Short Answer Questions – 1 Mark
Q1. What is meant by production?
Answer: Production is the process through which inputs are transformed into output.
Q2. What is a production function?
Answer: A production function shows the maximum output that can be produced from different combinations of inputs, given the available technology.
It may be written as:
q = f(L, K)
Q3. Which relationship is represented by a production function?
- Economic relationship between inputs and cost
- Technological relationship between inputs and output
- Relationship between output and price
- Relationship between cost and revenue
Answer: 2. Technological relationship between inputs and output
Q4. What is the difference between the short run and the long run?
Answer: In the short run, at least one factor of production is fixed. In the long run, all factors can be varied.
Q5. What is an isoquant?
Answer: An isoquant shows all combinations of two inputs that can produce the same maximum level of output.
Q6. Define total product.
Answer: Total product is the total output produced by different units of a variable input when all other inputs remain fixed.
Q7. Define average product.
Answer: Average product is output per unit of the variable input.
AP = TP/Units of variable input
Q8. Define marginal product.
Answer: Marginal product is the change in total product caused by employing one additional unit of the variable input.
MP = Change in TP/Change in input
Q9. How is TP obtained from MP?
- Cumulative addition
- Cumulative subtraction
- Cumulative multiplication
- Cumulative division
Answer: 1. Cumulative addition
Q10. What is MP when TP is at its maximum?
Answer: MP is zero when TP reaches its maximum.
Q11. State whether true or false: TP rises only when MP rises.
Answer: False. TP continues to rise as long as MP remains positive, even when MP is falling.
Q12. State whether true or false: Diminishing marginal product always causes TP to fall.
Answer: False. When MP is positive but falling, TP rises at a diminishing rate.
Q13. What happens to TP when MP becomes negative?
Answer: TP begins to fall when MP becomes negative.
Q14. What is the shape of the MP curve?
Answer: The MP curve is generally inverse U-shaped.
Q15. At which point does the MP curve cut the AP curve?
Answer: The MP curve cuts the AP curve from above at the maximum point of AP.
Q16. What is total fixed cost?
Answer: Total fixed cost is the cost incurred on fixed inputs. It remains unchanged at every level of output in the short run.
Q17. Why is TVC zero at zero output?
Answer: No variable input is employed when output is zero. Therefore, total variable cost is zero.
Q18. Why is TFC not zero at zero output?
Answer: Fixed costs must be paid even when the firm produces no output.
Q19. State the relationship between TC, TFC and TVC.
Answer:
TC = TFC + TVC
Q20. State the relationship between SAC, AVC and AFC.
Answer:
SAC = AVC + AFC
Q21. Why does the AFC curve never touch the x-axis?
Answer: TFC remains positive. As output rises, AFC becomes smaller but does not become zero at any finite output level.
Q22. What is the shape of the AFC curve?
Answer: The AFC curve is a downward-sloping rectangular hyperbola.
Q23. What is marginal cost?
Answer: Marginal cost is the change in total cost caused by producing one additional unit of output.
MC = Change in TC/Change in output
Q24. At which point does MC cut AVC?
Answer: MC cuts AVC from below at the minimum point of AVC.
Q25. At which point does MC cut AC?
Answer: MC cuts AC from below at the minimum point of AC.
Short Answer Questions – 3 or 4 Marks
Q26. Explain the concept of a production function.
Answer:
A production function shows the maximum output that a firm can produce with different combinations of inputs.
For a firm using labour and capital:
q = f(L, K)
Here:
- q represents output.
- L represents labour.
- K represents capital.
A production function assumes efficient use of inputs and is defined for a given technology. If technology improves, the maximum output possible from the same inputs increases.
Q27. Distinguish between the short run and the long run.
Answer:
| Basis | Short Run | Long Run |
| Inputs | At least one input is fixed | All inputs are variable |
| Output change | Only variable inputs can be changed | All inputs can be changed |
| Fixed costs | Present | Absent |
| Meaning | Defined by input flexibility | Defined by complete input flexibility |
Short run and long run are not determined by a fixed number of days or years.
Q28. Explain the relationship between TP and MP.
Answer:
TP is the sum of the marginal products of all units of the variable input.
- When MP rises, TP rises at an increasing rate.
- When MP falls but remains positive, TP rises at a decreasing rate.
- When MP is zero, TP is maximum.
- When MP becomes negative, TP falls.
Thus, the behaviour of MP determines the slope and direction of TP.
Q29. Explain the relationship between AP and MP.
Answer:
- When MP is greater than AP, AP rises.
- When MP equals AP, AP reaches its maximum.
- When MP is less than AP, AP falls.
- The MP curve cuts the AP curve from above at the maximum point of AP.
This relationship is similar to the relationship between an average and a marginal value.
Q30. State and explain the law of diminishing marginal product.
Answer:
The law of diminishing marginal product states that when additional units of a variable input are employed with other inputs fixed, the marginal product initially rises but begins to fall after a certain level of employment.
Initially, the fixed and variable factors are used more efficiently. After a point, the fixed factor becomes relatively insufficient, causing the marginal contribution of the variable input to decline.
Q31. What are returns to scale?
Answer:
Returns to scale explain how output changes when all inputs are increased in the same proportion in the long run.
There are three types:
- Constant returns to scale: Output rises in the same proportion as inputs.
- Increasing returns to scale: Output rises by a greater proportion than inputs.
- Decreasing returns to scale: Output rises by a smaller proportion than inputs.
Q32. Explain total fixed cost, total variable cost and total cost.
Answer:
Total fixed cost: Cost of fixed inputs. It remains constant at every output level.
Total variable cost: Cost of variable inputs. It increases as output rises and is zero at zero output.
Total cost: The total expenditure incurred in producing output.
TC = TFC + TVC
The vertical difference between the TC and TVC curves is equal to TFC.
Q33. Explain the relationship between MC and AVC.
Answer:
- When MC is below AVC, AVC falls.
- When MC equals AVC, AVC is minimum.
- When MC is above AVC, AVC rises.
Therefore, the MC curve cuts the AVC curve from below at its minimum point.
Q34. Explain the relationship between MC and AC.
Answer:
- When MC is below AC, AC falls.
- When MC equals AC, AC is minimum.
- When MC is above AC, AC rises.
Therefore, the MC curve cuts the AC curve from below at its minimum point.
Q35. Why is the short-run marginal cost curve U-shaped?
Answer:
The shape of the short-run marginal cost curve is connected to the law of variable proportions.
Initially, marginal product rises. Therefore, fewer additional inputs are required to produce an extra unit, and MC falls.
After a point, marginal product declines. More variable input is needed to produce each additional unit, causing MC to rise.
Therefore, the SMC curve is U-shaped.
Long Answer Questions – 5 or 6 Marks
Q36. Explain the law of variable proportions.
Answer:
The law of variable proportions explains how output changes when one input is varied while all other inputs remain fixed.
It states that the marginal product of a variable input initially rises and later falls as more units of that input are employed.
The behaviour can be explained as follows:
Increasing marginal product
In the beginning, the fixed factor is underutilised. Additional units of the variable factor improve coordination and specialisation. MP rises, and TP increases at an increasing rate.
Diminishing marginal product
After a certain point, the fixed factor becomes relatively scarce. MP starts falling but remains positive. TP continues to rise at a decreasing rate.
Negative marginal product
If more variable input is employed beyond an efficient level, overcrowding may occur. MP becomes negative, and TP starts falling.
The law operates in the short run because at least one factor remains fixed.
Q37. Explain the shapes of TP, AP and MP curves.
Answer:
The TP curve initially rises at an increasing rate because MP is rising.
It later rises at a decreasing rate when MP begins to fall but remains positive.
TP becomes maximum when MP is zero. TP falls when MP becomes negative.
The AP and MP curves are inverse U-shaped.
- When MP is greater than AP, AP rises.
- When MP equals AP, AP is maximum.
- When MP is lower than AP, AP falls.
Therefore, the MP curve cuts the AP curve from above at the maximum point of AP.
Q38. Explain the short-run cost curves.
Answer:
The main short-run cost curves are TFC, TVC, TC, AFC, AVC, SAC and SMC.
TFC curve
It is a horizontal straight line because total fixed cost remains constant.
TVC curve
It starts from the origin and rises as output increases.
TC curve
It begins from the level of TFC and rises with output. It is the vertical sum of TFC and TVC.
AFC curve
It slopes downwards because the same fixed cost is spread over more units.
AVC and SAC curves
Both are U-shaped. SAC lies above AVC, and the vertical difference between them equals AFC.
SMC curve
SMC is U-shaped. It cuts AVC and SAC from below at their respective minimum points.
Q39. Explain the long-run average and marginal cost curves.
Answer:
In the long run, all inputs are variable and there are no fixed costs.
The LRAC curve is generally U-shaped because of returns to scale.
- Under increasing returns to scale, output rises faster than cost, so LRAC falls.
- Under constant returns to scale, output and cost rise proportionately, so LRAC remains constant.
- Under decreasing returns to scale, cost rises faster than output, so LRAC rises.
The LRMC curve is also U-shaped.
- When LRMC is below LRAC, LRAC falls.
- When LRMC equals LRAC, LRAC is minimum.
- When LRMC is above LRAC, LRAC rises.
LRMC cuts LRAC from below at its minimum point.
Numerical Questions on Production and Costs
Q40. Calculate AP and MP from the following TP schedule.
| Labour | TP |
| 0 | 0 |
| 1 | 10 |
| 2 | 24 |
| 3 | 40 |
| 4 | 50 |
Answer:
AP = TP/Labour
MP = Change in TP
| Labour | TP | AP | MP |
| 0 | 0 | – | – |
| 1 | 10 | 10 | 10 |
| 2 | 24 | 12 | 14 |
| 3 | 40 | 13.33 | 16 |
| 4 | 50 | 12.5 | 10 |
Q41. Calculate TP and MP from the following AP schedule.
| Labour | AP |
| 1 | 2 |
| 2 | 3 |
| 3 | 4 |
| 4 | 4.25 |
Answer:
TP = AP × Labour
MP = Change in TP
| Labour | AP | TP | MP |
| 1 | 2 | 2 | 2 |
| 2 | 3 | 6 | 4 |
| 3 | 4 | 12 | 6 |
| 4 | 4.25 | 17 | 5 |
Q42. A firm has the production function q = 5L½K½. Find output when L = 100 and K = 100.
Answer:
q = 5L½K½
q = 5 × √100 × √100
q = 5 × 10 × 10
Maximum output = 500 units
Q43. The total cost of producing zero units is ₹10. At four units, total cost is ₹70. Calculate TFC and TVC at four units.
Answer:
TFC equals total cost at zero output.
TFC = ₹10
TVC = TC − TFC
TVC = 70 − 10
TFC = ₹10
TVC at four units = ₹60
Q44. A firm’s TFC is ₹20 and TVC at five units is ₹40. Calculate TC, AFC and AVC.
Answer:
TC = TFC + TVC
TC = 20 + 40 = ₹60
AFC = TFC/q
AFC = 20/5 = ₹4
AVC = TVC/q
AVC = 40/5 = ₹8
TC = ₹60
AFC = ₹4
AVC = ₹8
Useful Links for Class 12 Micro Economics Important Questions
| Section | Useful Links |
| Important Questions | Important Questions Class 12 Micro Economics |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 1 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 2 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 4 |
| Chapter Questions | Important Questions Class 12 Micro Economics Chapter 5 |
| Economics Important Questions | Important Questions Class 12 Economics |
| CBSE Important Questions | CBSE Important Questions |
FAQs (Frequently Asked Questions)
MP measures the addition to TP. When MP becomes zero, an additional unit of input adds nothing to output. Therefore, TP reaches its maximum.
Yes. TP increases as long as MP remains positive. If MP is positive but falling, TP rises at a decreasing rate.
Initially, better use of the fixed factor raises productivity. After a point, the fixed factor becomes insufficient, causing both AP and MP to fall.
A marginal value pulls an average down when it is below the average and pulls it up when it is above. Therefore, MC equals AC or AVC at their minimum points.
TFC remains constant while output rises. Dividing the same fixed cost by a larger quantity causes AFC to decline continuously.