The law of variable proportions operates in which situation?
- A.When all factors of production are increased in the same proportion
- B.When one factor is varied and the others are held fixed
- C.Only in the long run
- D.Only when the firm is in equilibrium
Correct answer
Explanation
The correct answer is B, when one factor is varied and the others are held fixed. This is the defining condition of the short run, where plant and machinery cannot be changed, so only the proportion between the variable factor and the fixed factor alters. The law then gives three stages: increasing returns, as the fixed factor is used better; diminishing returns, as it becomes crowded; and negative returns, where extra units reduce total product. Option A is wrong because changing all factors in the same proportion is the condition for returns to scale. Option C is wrong because the long run is precisely the period in which no factor is fixed, so this short-run law cannot apply there. Option D is wrong because the law describes the behaviour of output at every level, whether or not the firm has reached its profit maximising output.
Read the full article: Production, Cost and Revenue: Concepts and Formulas
Practice Questions
View allWhich of the following costs remains the same at every level of output in the short run?
- A.Total variable cost
- B.Total fixed cost
- C.Marginal cost
- D.Average cost
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Fixed cost is the payment for factors that cannot be varied in the short run, such as the rent of the factory building, insurance and the salary of permanent staff, and it has to be met even when output is zero, which is why it is also called supplementary or…
Read the full explanation →As the level of output increases, the average fixed cost of a firm
- A.remains constant
- B.rises continuously
- C.falls continuously but never becomes zero
- D.first falls and then rises
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Average fixed cost is total fixed cost divided by output; the numerator is unchanged, so a larger output spreads the same fixed cost over more units.
Read the full explanation →The marginal cost curve cuts the average cost curve at
- A.the minimum point of the average cost curve
- B.the maximum point of the average cost curve
- C.the point where average cost equals average fixed cost
- D.no point at all
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The reason is arithmetic rather than economic: so long as marginal cost is below average cost, each extra unit pulls the average down, and once marginal cost rises above average cost the average must rise, so the two can only be equal where the average is at its lowest.
Read the full explanation →Under perfect competition, the average revenue of a firm is equal to
- A.total cost
- B.marginal cost only
- C.price and marginal revenue
- D.half the price
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A firm in perfect competition is a price taker because its output is a negligible part of the market, so it can sell any quantity at the ruling price.
Read the full explanation →A producer is in equilibrium when
- A.marginal revenue equals marginal cost and marginal cost is rising
- B.average revenue equals average fixed cost
- C.total revenue is at its maximum
- D.marginal cost is at its minimum
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Both conditions are needed. If marginal revenue exceeds marginal cost the firm gains by producing more, and if marginal cost exceeds marginal revenue it gains by producing less, so profit can be highest only where they are equal; and the equality must occur on the rising part of the marginal…
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