U-shaped average cost curve is based on:
Options
ALaw of constant returns
BLaw of variable proportions
CLaw of supply
DLaw of demand
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Theory of Production and CostPYQ - July 2021Question 59 of 20
All Questions Correct Answer
✅ Option b — Law of variable proportions
All Options:
- ALaw of constant returns
- BLaw of variable proportions
- CLaw of supply
- DLaw of demand
Detailed Solution & Explanation
To understand the U-shaped average cost curve, we need to consider the concept of production and costs in economics.
• The U-shaped average cost curve is a graphical representation of how costs change as output increases.
• This curve is based on the law of variable proportions, which states that as the quantity of a variable input is increased, while holding other inputs constant, the marginal product of that input will eventually decrease.
• The law of variable proportions explains how the average cost of production changes as output increases, resulting in a U-shaped curve.
• The U-shaped curve is characterized by decreasing average costs at first, followed by increasing average costs as output continues to rise.
The correct answer is based on the law of variable proportions because it explains the behavior of costs as output changes.
• Option A, the law of constant returns, is incorrect because it implies that costs remain constant as output increases, which is not consistent with the U-shaped curve.
• Option C, the law of supply, is also incorrect because it relates to the behavior of suppliers in a market, rather than the production costs of a firm.
About This Chapter: Theory of Production and Cost
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Function, Cost Concepts (Short/Long Run)
This chapter explores how firms produce goods and services. It covers Production Functions, the Laws of Returns (Increasing, Constant, Diminishing), and all cost concepts including Total Cost, Average Cost, Marginal Cost, Fixed Cost, and Variable Cost. Understanding why the AC and MC curves are U-shaped is crucial for exam success.
View Official ICAI SyllabusExam Strategy Tip
The relationship between MC and AC curves is a favorite examiner topic. Remember: MC cuts AC at its minimum point. Also focus on the difference between Short Run and Long Run cost curves.
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