Question

Choose a,b,c,d

ra firm is as follows, which statement is correct? Oe T1 Tetal Preduct A) MP, is increasing in phase I B) MP, is increasing in phase II. ceasig in phase II1. D) MP is maximized in the edge of phase II and II1.

Answer 1

The total product refers to the total amount (or volume ) of output produced with a given amount of input during a period of time. Therefore, a firm wanting to increase its Total Product in the short run will have to increase its variable factors as the fixed factors remain unchanged ( that is why they are 'fixed' in the short run).

In the long run, as we know that all factors become variable, the firm can increase its total product by increasing any of its factors as all factors become variable. The concept of the Total Product helps us understand what is called the Marginal Product. The Total Product can be calculated by adding subsequent marginal returns to an input (also known as the marginal product ). The increase in output per unit increase in input is called Marginal Product. Thus, if we were to assume Labour as the input used in the production process, the Marginal Product can be calculated as follows:-

MP = Change in output / Change in input ( here ,Labour)

TP = $\small \sum MP$

While, Average Product as the name suggests, refers to the per unit total product of the variable factor ( here, labor ). Hence, the calculation of Average product is also very simple

AP = Total Product/ units of variable factor input = TP/L  

Where TP = AP*L

The Law of variable proportions holds various assumptions:-

- Only one input is variable and all other inputs are held constant.

-The proportion in which factor units are used may be changed.

- The state of technology and factor prices are assumed to be constant.

- The time period in the short- run.

The statement which holds true in the given question is that MP_L is maximized in the edge of phase II and phase III. While stage I is the stage of increasing returns to a factor, this stage refers to that phase in the production process where MP is increasing and reaches its maximum point. It is the phase where TP is increasing at an increasing rate. This stage starts from the origin and extends to the point of inflection- the point on the TP curve after which TP increases at a diminishing rate.

Since TP is increasing at an increasing rate in this phase, it is profitable for the firm to continue employing more units of the variable factor to increase its production. Hence, the firm never operates in Stage I.

However, Stage II is called the stage of Diminishing returns to a factor. It refers to the phase where TP increases at a diminishing rate and reaches its maximum. In this phase, MP is declining but not that it still remains positive. This stage ends where MP=0. Since this implies efficient utilization of the fixed factor, a firm always operates in the second stage of production. Thus, the MP curve initially increases, reaches its maximum and then declines.

The fixed factor is limited in the short run. If we go on increasing the variable factor beyond a certain point, it will mean inefficient usage of the fixed factor, acted upon by the variable factor. This is why MP becomes negative. The efficiency of variable factor may also be a reason for negative returns. If more and more labor is added to fixed capital ( say, machinery), the marginal contribution of each variable factor becomes less, leading to overcrowding.

The efficiency of the fixed factor is also affected in the case of overcrowding of the variable factor. Too many laborers may cause chaos and wear and tear of machinery, which ultimately causes TP to fall.