Question

1-What are the fixed costs for the firm? The variable costs?
2- What do you understand by the law of diminishing returns? Can you give an example of when diminishing returns have set in at the place you work? If diminishing returns have set in then what do you think is happening to the short run costs?Why?
3- What is the difference between diminishing returns and decreasing returns to scale? What kind of returns to scale are possible or observed in your organization? Why? An expanding company is a sign of increasing returns to scale while a company that is downsizing is usually experiencing decreasing returns to scale. Is the firm expanding or downsizing? Can you assess the shape of the long-run average cost curve for the organization ? you do not need to estimate the cost function, merely, on the basis of the Knowledge of the firm and the return to scale it is experiencing, what do you think the curve looks like and why?

Answer 1

1, Fixed cost:- cost incurred by the producer for the purchase of fixed input is called fixedcost. In the short run, fixed cost at the cost which do not change. This cost will not change with the change in quantity of output. Cost that do not change with the changes in output is called a fixed cost.

Example; Salary of staffs, rent for land and building, interest on loans, insurance premium etc,.

Variable cost:- cost incurred by the producer on variable input is called a variable cost. This cost change as the quantity of output changes. Therefore, cost that changed with change in quantity of output is called a variable cost. When production become zero variable cost also become zero. When the output is positive, variable cost also become positive.

Examples:- Cost of raw materials, wages of temporary employees etc,.