Q11 of 24 Page 1

a) Why is Total Variable Cost curve inverse S-shaped?

b) What is Average Fixed Cost of a firm? Why is an Average Fixed Cost Curve a rectangular Hyperbola? Explain with help of a diagram.



Total Cost is the summation of Total Variable Cost and Total Fixed Cost. In the short run, the TFC is constant and parallel to the X-axis. The TFC is constant because the fixed cost does not change when there is an increase in output. The Total Variable Cost (TVC) is the cost incurred per unit of variable input employed. The TVC curve is an inverted S upward sloping curve. The main reason for the shape of the TVC curve is the operation of the law of variable proportion. As the total output increases, the TVC initially increases at a decreasing when the production is experiencing increasing returns. Consequently, as the production rises, the excessive use of the variable factor raises the cost in the stage of diminishing returns. This gives the TVC curve an inverted S-shape.


b) Total fixed cost (TCF) is the fixed cost for the production of output. TFC is constant because the fixed cost does not change when there is an increase in output. The Average Fixed Cost (AFC) is the fixed cost incurred per unit of output produced. It is the ratio between the total fixed cost and the number of units of output produced.


AFC = TFC/Q


The shape of the AFC curve is a rectangular hyperbola. Since the TFC is constant at all units of output, as output increases, the fixed cost gets spread over the units of output. When the same fixed cost is divided by increasing units of output, AFC declines. Thus as output increases, AFC diminishes. This gives the AFC curve the shape of a rectangular hyperbola.



More from this chapter

All 24 →
9

Explain how the following factors affect the supply of the commodity (any two)

a) Price of factor inputs


b) State of technology


c) Government taxation Policy

 10

a) A consumer, Mr Aman is in the state of equilibrium consuming two goods X and Y, with given prices Px and Py. What will happen if MUx/Px>MUy/Py?

b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for the choice of your answer:


i. Lower indifference curve represents a lower level of satisfaction.


ii. Two indifference curves can intersect each other.


iii. Indifference curve must be convex to the origin at the point of tangency with the budget line at the consumer's equilibrium.


iv. Indifference curves are drawn under the ordinal approach to consumer equilibrium.


OR


A consumer has total money income of 500 to be spent on two goods X and Y with prices of 50 and 10 per unit respectively. On the basis of the given information, answer the following questions:


a. Give the equation of the budget line for the consumer.


b. What is the value of the slope of the budget line?


c. How many units can the consumer buy if he is to spend all his money income on good X?


d. How does the budget line change if there is a 50% fall in the price of good Y?

 12

Suppose the value of demand and supply curves of a Commodity-X is given by the following two equations simultaneously: Qd = 200 –10p Qs = 50 + 15p

i) Find the equilibrium price and equilibrium quantity of commodity X.


ii) Suppose that the price of a factor inputs used in producing the commodity has changed, resulting in the new supply curve given by the equation Qs’ = 100 + 15p Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity

 13

Define money supply