1. Cost

5. VG/lv/P-II-6 Factors hired Cost (Rs.) seed 750.00 labor 1900.00 tractor 2000.00 fertilizer 1100.00 tube well 1250.00 Explicit cost 7000.00 Self-owned factor Opportunity Cost (Rs.) family labor 3500.00 land 5000.00 Implicit cost 8500.00 Economic cost 15500.00

9. m TVC =  Pj Xj j =1 Where Pj = prices of specified variable inputs Xj = quantity of variable inputs m = number of variable inputs Total cost = TFC + TVC Q = 0, TVC = 0 , TC = TFC

13. Cost behavior with increasing and diminishing returns to variable inputs TP = Q = a + bx +cx 2 – dx 3 AP vi = b + cx – dx 2 MP vi = b + 2cx – 3dx 2 TFC = a TVC = bQ – CQ 2 + dQ 3 TC = TFC + TVC = a + bQ – cQ 2 + dQ 3 VG/lv/P-II-6

16. Results of empirical studies of short-run cost functions Source: A.A. Walters, “production and cost functions”, Econometrica, Vol. 31, No.1 (January 1963), pp.1-66 VG/lv/P-II-6 Name Type of Industry Finding Lester (1946) Manufacturing AVC decreases up to capacity level of output Hall and Hitch (1939) Manufacturing Majority have decreasing MC. Johnston (1960) Electricity multiple-product food processing “ Direct” cost is a linear function of output, and MC is constant. Dean (1936) Furniture Constant MC which failed to rise Dean (1941) Leather belts No significant increases in MC Dean (1941) Hosiery Constant MC which failed to rise. Dean (1942) Department store Declining or constant MC , depending on the department within the store. Ezekiel and Wylie (1941) Steel Declining MC but large variation. Yntema (1940) Steel Constant MC Johnston Electricity ATC falls, then flattens, tending toward constant Mc up to capacity. Mansfield & Wein (1958) Railways Constant MC

19. 0 100% OF CAPACITY 90% 50% cost AFC AVC MC AC 100% OF CAPACITY 90% 0 50% cost McGraw Hill Study TFC TVC TC

25. Q MES 1/3 1/2 1 AC 0 cost Pratten’s Study

26. Cost disadvantage of plants that are 50% of MES Industry Cost disadvantage (%) Industry Cost disadvantage (%) Flour mill 3.0 Synthetic rubber 15.0 Bread baking 7.5 Detergents 2.5 Paper printing 9.0 Bricks 25.0 Sulphuric acid 1.0 Machine tools 5.0

31. Results of empirical studies of long-run cost function Source – A.A. Walters, “ production and cost functions,” Econometrica, vol. 31, no.1 (January 1963), pp. 1-66 VG/lv/P-II-6 Name Type of Industry Finding Bain (1956) Manufacturing Small economies of scale for Multiplant firms. Holton (1956) Retailing LRAC is L-shaped. Alpert (1959) Metal Economies of scale up to an output of 80,000 lbs per month; constant returns to scale and horizontal LRAC thereafter. Moore (1959) Manufacturing Economies of scale prevail quite generally. Lomax (1951) and Gribbin (1953) Gas (Great Britain) LRAC of production declines as output rises. Loxam (1952) and Johnston (1960) Electricity (Great Britain) LRAC of production declines as output rises. Johnston (1960) Life assurance LRAC declines. Johnston (1960) Road passenger transport (Great Britain) LRAC either falling or constant. Nerlove (1961) Electricity (U.S.) LRAC (excluding transmission costs) declines and then shows signs of increasing.

34. Output elasticity of total cost- Responsiveness of TC to the change in total production . If e TC , Q <1 Economies of scale e tc , Q >1 Diseconomies of scale VG/lv/P-II-6