Question

Question 18 Which of the following statement is NOT true?

a. if fixed costs exist, the AVC and ATC move away from each other as output decreases

b. Diminishing marginal return occurs as more labourers are hired, workers increasingly share the use of other fixed inputs, and so their ability to be increasingly productive is limited.

c. workers have an incentive to exert higher effort when a wage is equal to the income earned minus $20,000 than when a wage is equal to the income earned minus $10,000

d. strengthening of board’s monitoring the hired managers is a way to minimize the agency costs.

Answer 1

ans a) TRUE

ATC= AVC+ AFC

AFC= TFC/Q

as TFC is constant

AFC will increase as Q decreases as AFC is the difference between AVC and ATC. AFC increases as Q decreases, gap between ATC and AVC widens up and moves away from each other

ans b) TRUE

according to diminishing marginal return , if more of variable factor(labour) is used with fixed factor, then MP decreases as we add more of labour with fixed inputs because they will not able to use fixed factor in a effciciet way due to overcrowding, so production will increase upto a limit

ans c) false

yes as net income earned or wages is higher in 2nd case as compared to 1st case , workers will put more efforts in 2nd case and not in 1st case

and d) true

if better monitoring will be done of hired managers then production or their effeciency will improve so cost per unit of output of managing will decrease