1.

Identify the equilibrium level of output using “marginal cost and marginal revenue” approach. Give reasons for your answer.Price (₹)Output (Units)Total cost (₹)Marginal cost (₹)61101062155632166428765379

Answer»
Variable input (Units)Total product (Units)MP
133
274
3103
4122
511-1
  • Increasing returns to factor 

• Diminishing returns to factor 

• Negative returns to factor 

There are three phases of law of variable proportion i.e., increasing returns to factors, diminishing returns to factor and negative returns to factor. Increasing returns to factors is a phase in which TP increases at increasing rate and MP also rises. This can be identified between variable input 1 and 2 where MP rises from 3 to 4 units. 

Diminishing returns to factors is a phase in which TP increases at diminishing rate and MP falls but remains positive from unit 2 to 4 it can be observed that MP is falling but is positive.

Negative returns to factor is a phase in which TP falls and MP becomes negative. From unit 4 to 5 it can be observed that MP becomes negative.


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