Which one of the following statements is not correct ?
Average cost equals marginal cost where marginal cost is minimum.
Option 4 is the incorrect statement. The two curves meet where average cost is at its minimum, not where marginal cost is at its minimum.
The relationship between the AC and MC curves. Both are U-shaped, and their positions relative to one another follow from a single arithmetical fact about averages :
| When | What happens to AC |
|---|---|
| MC < AC | AC is falling — adding an item below the current average pulls the average down |
| MC = AC | AC is at its minimum — it has stopped falling and not yet begun to rise |
| MC > AC | AC is rising |
So the MC curve must cut the AC curve exactly at the lowest point of AC, and it does so from below. That is statement 3, which is therefore correct — and it is the direct contradiction of statement 4.
Where MC reaches its own minimum. Earlier, and to the left of the AC minimum. At that point MC is still below AC, so AC is still falling. The two curves are nowhere near equal there. The order along the output axis is: MC minimum first, then AVC minimum, then AC minimum — and MC passes through the lowest point of both AVC and AC.
Why statements 1 and 2 are correct. Marginal cost is the cost of the additional unit alone, while average cost spreads the whole cost over all units. The average therefore responds sluggishly — it is anchored by everything produced so far. The marginal figure moves freely, so it falls faster and later rises faster, which is why the MC curve is steeper on both limbs and lies inside the AC curve.
The intuition, put plainly. Think of a batsman’s average. If his score in the next innings is below his average, his average falls; if above, it rises; and his average is at its lowest exactly when the new score equals it. The new innings is the marginal value and the career figure is the average — the relationship is identical.
The same rule applies to AVC, and note that AFC falls continuously as output rises, since a fixed total is divided by an ever larger number, which is why AC and AVC converge at high output.
Hence, the incorrect statement is option 4.
Similar Questions
Match the production functions List - I with the return to scale List - II.
List - I (Production function) List - II (Return to scale) (a) \( Q = 10\,K^{0.5}L^{0.4}E^{0.15}M^{0.1} \) (i) increasing (b) \( Q = 12\,K^{0.5}L^{0.5} \) (ii) constant (c) \( Q = 100\,K + 15\,L \) (iii) decreasing (d) \( Q = 40\,K^{0.3}L^{0.5} \) Code :
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Managerial economics is concerned with which combination of the following ?
(a) Investment Analysis and Decisions
(b) Production Behaviour and Cost Analysis
(c) Input Reward Analysis and Decisions
(d) Economic Environment Analysis
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When P0 and P1 and Q0 and Q1 denote before and after change in the price and quantity respectively and in both the situations, total outlay remains the same, which of the following formulae give the similar value of the arc price - elasticity of demand ?
(a) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{0}+P_{1}}{Q_{0}+Q_{1}}\)
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(c) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{0}}{Q_{0}}\)
(d) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{1}}{Q_{1}}\)
(e) \(\dfrac{Q_{0}-Q_{1}}{P_{0}-P_{1}}\times\dfrac{P_{1}}{Q_{0}}\)
Code :
In case the producer's equilibrium shifts to a higher isoquant due to decrease in price of an input, the curve combining the successive equilibrium positions is known as :
For the following two statements of Assertion (A) and Reasoning (R), indicate the correct code :
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Reasoning (R) : Isoquants will slope positively if the use of an input is increased beyond the limit set by the ridge lines.
Code :
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Statement (I): The elasticity of factor substitution is formally defined as the percentage change in the capital-labour ratio divided by the percentage change in the marginal rate of technical substitution.
Statement (II): \(Q = K^{0.5} L^{0.3}\) is a production function where Q = output, K = units of capital and L = units of labour. This production function shows the application of increasing returns to scale.
Codes:
Law of Diminishing Return applies when the gaps among the successive ‘multiple-level of output’ isoquants:
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Important Questions from Production Function
For the following two statements of Assertion (A) and Reasoning (R) suggest the correct code:
Assertion (A): Low initial price regarded as the principal means for entering into mass market for some new products.
Reasoning (R): Firms generally enter into production of new products with excess capacity of the plant initially.
Code:
Indicate the correct code from the following types of the long run average cost curves on which the minimum average cost of production in long run can be determined:
(i) Long run average cost curve under normal production function
(ii) Long run average cost curve under linearly homogeneous production function
(iii) Planning curve
(iv) Envelope curve
Choose the correct answer from the code given below :
Which of the following is not an attribute of production function?
Which of the following is an example of non-durable goods?
What is constant along an isoquant?
