Question

State whether the following statements are true or false. Give reasons for your answer:

(a) Under diminishing returns to a factor, marginal product and total product both increase at a diminishing rate.

(b) When marginal cost rises, average cost also rises.

(c) Marginal Revenue can never be negative.

Answer 1

(a) False, because when MP falls, while TP increase at a diminishing rate only upto a point, then starts falling.

(b) False, because AC rises only when MC is greater than AC.

(c) False, because when a firm can sell more only by lowering the price it is possible that marginal revenue becomes negative after a level of output.