Production and Costs — Important Questions

Marginal product first increases, Marginal product then decreases, Applies when one factor is fixed

The law of variable proportions states that when one factor is held constant and another is increased, marginal product first rises, then falls. This happens because initially factor proportions become more suitable, but later the production process becomes crowded.

Total Fixed Cost

Total Fixed Cost (TFC) remains constant regardless of the level of output produced. These are costs like rent, insurance, etc. that must be paid even if production is zero. All other costs change with output level.

All costs are variable

In the long run, all inputs can be varied, so there are no fixed costs. All costs become variable because the firm can adjust all factors of production including plant size, machinery, etc.

Downward sloping (rectangular hyperbola)

AFC = TFC/Q. Since TFC is constant and Q increases, AFC continuously decreases as output increases. The curve is a rectangular hyperbola because AFC × Q always equals the same constant (TFC).