Assignment-2               MICROECONOMICS-ECO-201

Q-1.Discuss short run production function with reference to diminishing returns to scale (draw the required graph)?

• The short run is a time period where at least one factor of production is in fixed supply. A business has chosen its scale of production and must stick with this in the short run.                   We assume that the quantity of plant and machinery is fixed and that production can be altered by changing variable inputs such as labor, raw materials and energy.                                           The time periods used differ from one industry to another the short-run in the electricity generation industry differs from the local restaurant.
• Diminishing Returns occurs in the short run when one factor is fixed If the variable factor of production increases, there comes a point where it will become less productive and there will be a decreasing marginal and then average product
This is because if capital is fixed extra workers will get in each other’s way as they attempt to increase production If more workers are employed production could increase but more and more slowly.                                                                                             This law only applies in the short run because in the long run all factors are variable
The Marginal Cost (MC) of a product will be the Cost of the worker divided by the number of extra products that are produced
Therefore as MP increases MC declines and vice versa.

Q2.Calculate average fixed costs, average variable costs and total cost from the given table .Draw the average cost curves using the values in the table.
output F.C V.C T.C AFC AVC ATC
0 800 0 800 0 0 0
1 800 200 1000 800 200 1000
2 800 450 1250 400 225 625
3 800 750 1550 266.6 250 516.6
4 800 1200 2000 200 300 500
5 800 1700 2500 160 340 500