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Managerial Economics - Relationship between Average Product and Marginal Product

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Assignment: Managerial Economics
1. Discuss the relationship between Average Product and Marginal Product, and
Average Variable Cost and Marginal Cost.
Ans. Relationship between Average Product and Marginal Product:
1. In 1
st
case of production , both Marginal and Average Product go on increasing.
2. Average Product increase when Marginal Product is greater than it.
3. Average Product is maximum when the value of Marginal Product is equal to
it.
4. Average Product decreases when Marginal Product is less than it.
5. Marginal Product can be zero but Average Product can never be zero.
6. In graph, Marginal Product Curve will always be on left hand side of Average
Product Curve.
Relationship between Average Variable Cost and Marginal Cost:
1. When TVC increases at a decreasing rate, both AVC and MC decrease, but
MC is less than AVC.
2. MC reaches its minimum point at the at which TVC reaches its inflection
point, at its minimum; MC is less than AVC.
3. For all output levels beyond minimum of AVC, both AVC and MC increase,
with MC rising at faster rate(MC lies above AVC).
2. State the Law of Demand. Explain with examples the difference in demand
curve for substitutes and complements.
Ans. Law of demand:
Law of Demand states that other things remaining same, Quantity demanded
increases with the fall in its price and Quantity demanded decreases with the
rise in its own price.
Difference in demand curve for substitutes and complements:
Substitutes Goods are those goods which can be used in place of some other
goods. Examples: TEA-COFFEE, RICE-WHEAT. In case of substitutes, the

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relationship is positive because if the price of tea will increase, the demand of
coffee will increase and vice versa.
Where as
Complimentary Goods are those goods which are jointly used. Examples: PEN-
INK, BREAD-BUTTER. In case of complimentary goods, the relationship is
negative because if the price of Bread will increase, the demand of butter will
decrease and vice versa.
3. What are the features of perfectly competitive market? Explain the perfectly
competitive industry when (a) firms enter the industry, (b) firms leave the
industry.
Ans. Perfect Competition Market:
It is a market situation in which there are large number of buyers and sellers
and each buyer and seller is a price taker. Therefore, there is always a
competition in the market.
Features of Perfect Competition Market:
1. Large number of buyer and seller.
2. Homogeneous Product.
3. Free Entry and Exit.
4. Factors of Production are perfectly mobile.
5. Perfect Knowledge of Market.
(a) Firms enter the industry: In case of super normal profit, more firms will join the
industry. As soon as the more firms will join, the supply will increase. The price
of the commodity is high when supply is less. But in this case, due to the joining
of more firms, the supply increases which slowly reduces the market price.
Slowly, the situation of Super Normal Profit decreases and is brought to the level
of Normal Profit. At this point, new industries will stop joining.
(b) Firms leave the industry: In case of Super Normal Loss, the existing firms tries
to move out of the industries, as the firms move out, the supply gradually

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Assignment: Managerial Economics 1. Discuss the relationship between Average Product and Marginal Product, and Average Variable Cost and Marginal Cost. Ans. Relationship between Average Product and Marginal Product: 1. In 1st case of production , both Marginal and Average Product go on increasing. 2. Average Product increase when Marginal Product is greater than it. 3. Average Product is maximum when the value of Marginal Product is equal to it. 4. Average Product decreases when Marginal Product is less than it. 5. Marginal Product can be zero but Average Product can never be zero. 6. In graph, Marginal Product Curve will always be on left hand side of Average Product Curve. Relationship between Average Variable Cost and Marginal Cost: 1. When TVC increases at a decreasing rate, both AVC and MC decrease, but MC is less than AVC. 2. MC reaches its minimum point at the at ...
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