CUET UG Economics Booster Test 3

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CUET UG Economics Booster Test 3 - Returns to Scale

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Returns to Scale

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QUESTION 1 OF 20

When analyzing Scaling Factors Simultaneously, multiplying inputs by a constant t > 1 ensures we are measuring scale returns and not the __________, which applies when one factor is kept constant.

Answer Review

1 When analyzing Scaling Factors Simultaneously, multiplying inputs by a constant t > 1 ensures we are measuring scale returns and not the __________, which applies when one factor is kept constant.

A Law of Variable Proportions

B Law of Demand

C Cobb-Douglas constant

D Returns to scale equilibrium

💡 Short Explanation

�� Returns to Scale is a long-run concept. �� All inputs increase proportionately. �� Law of Variable Proportions applies when one factor is fixed.

✅ Correct Answer Explanation

Returns to Scale measures the effect on output when all inputs are increased in the same proportion. This is a long-run concept because every factor of production is variable. The Law of Variable Proportions, however, is a short-run concept, where only one input is varied while at least one input remains fixed. Therefore, scaling all inputs by a constant factor t > 1 measures Returns to Scale rather than the Law of Variable Proportions. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Law of Demand explains the inverse relationship between price and quantity demanded, not production.
�� Option C → Cobb-Douglas is only one form of production function and is not contrasted with Returns to Scale in this context.
�� Option D → Returns to Scale Equilibrium is not the concept being compared here.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Identify whether the question discusses changing all inputs or only one input.

Final Logic:

All inputs change ⇒ Returns to Scale.
One input changes ⇒ Law of Variable Proportions.

🧠 Memory Trick

One Changes = Variable Proportions

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Returns to Scale vs Law of Variable Proportions

2 Match the scaling operations with the correct economic timeframe and condition.

List I	List II
1. One input scaled, others fixed	a. Long Run Scale Changes
2. Both inputs scaled proportionally	b. Short Run Variable Proportions
3. All factors of production are variable	c. Returns to Scale
4. At least one factor of production remains fixed	d. Law of Variable Proportions

A 1-b, 2-a, 3-c, 4-d

B 1-a, 2-b, 3-d, 4-c

C 1-a, 2-a, 3-b, 4-d

D 1-b, 2-b, 3-c, 4-a

💡 Short Explanation

�� The short run has at least one fixed factor. �� The long run allows all factors to vary. �� Returns to Scale is a long-run concept, while the Law of Variable Proportions is a short-run concept.

✅ Correct Answer Explanation

According to NCERT, production analysis differs in the short run and the long run depending on whether all factors of production can be varied. 1 → b When only one input is varied while the remaining inputs are kept fixed, production is analysed under the Law of Variable Proportions in the short run. Therefore, 1 → b. 2 → a When all inputs are increased proportionately, production is analysed under Returns to Scale in the long run. Therefore, 2 → a. 3 → c In the long run, all factors of production are variable. This gives rise to the study of Returns to Scale. Therefore, 3 → c. 4 → d In the short run, at least one factor of production remains fixed. This is the basis of the Law of Variable Proportions. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrect because the short-run and long-run concepts are reversed, and Returns to Scale is incorrectly matched.
�� Option C → Incorrect because varying one input is not a long-run phenomenon, and all factors variable cannot represent the short run.
�� Option D → Incorrect because scaling all inputs proportionately is a long-run concept, not a short-run concept.

🎯 Strategy

Used: Option Grouping

Application:

Match each production situation with the appropriate NCERT concept by identifying whether one input or all inputs are varied.

Final Logic:

One Input → Short Run → Law of Variable Proportions.
All Inputs → Long Run → Returns to Scale.

🧠 Memory Trick

All → Long

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Short Run and Long Run; Law of Variable Proportions; Returns to Scale

3 Assertion (A): Under a CRS production function, doubling the input scale inherently doubles the total variable costs in the long run.
Reason (R): CRS implies that cost increases by the identical proportion as input increases, which translates to a constant long-run average cost.

A Both A and R are true and R is the correct explanation of A

B Both A and R are true but R is not the correct explanation of A

C A is true but R is false

D A is false but R is true

💡 Short Explanation

�� CRS means proportional input-output changes. �� Costs rise proportionately. �� LRAC remains constant.

✅ Correct Answer Explanation

Under Constant Returns to Scale (CRS), if all inputs double, output also doubles. Since the quantities of inputs double, the total production cost also doubles, assuming constant input prices. Because both output and cost increase proportionately, Long Run Average Cost remains constant. The Reason correctly explains why the Assertion is true. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → The Reason directly explains the Assertion.
�� Option C → Both statements are true.
�� Option D → Assertion is also correct.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Check whether the Reason explains the proportional relationship in CRS.

Final Logic:

CRS ⇒ Inputs ↑ = Costs ↑ = Output ↑ proportionately.

🧠 Memory Trick

CRS = Equal Increase Everywhere

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Returns to Scale

4 In a model where q = f(L, K) follows CRS, what is the mathematical consequence if L and K are multiplied by a factor of 1?

A Output becomes 0

B Output doubles

C Output remains exactly the same

D It represents decreasing returns to scale

💡 Short Explanation

�� Multiplying by 1 changes nothing. �� Inputs remain unchanged. �� Output also remains unchanged.

✅ Correct Answer Explanation

If the scaling factor t = 1, then: f(1L,1K) = 1 × f(L,K) Since multiplying by one leaves both inputs unchanged, production also remains unchanged. Thus, output remains exactly the same. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → Output does not become zero.
�� Option B → Doubling requires t = 2, not t = 1.
�� Option D → No scaling occurs, so DRS is not involved.

🎯 Strategy

Used

Substitution

Application:

Replace t = 1 directly into the CRS equation.

Final Logic:

t = 1 ⇒ No Change.

🧠 Memory Trick

One Means Same

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: CRS Mathematical Identity

5 Arrange the logical sequence of firm behaviour leading to IRS:
1. Firm increases both inputs by t times.
2. Factors coordinate more efficiently at a larger scale.
3. Output increases by a proportion greater than t.

A 2 → 1 → 3

B 1 → 2 → 3

C 3 → 1 → 2

D 1 → 3 → 2

💡 Short Explanation

�� Firm first scales all inputs. �� Efficiency improves. �� Output rises more than proportionately.

✅ Correct Answer Explanation

The logical progression under Increasing Returns to Scale (IRS) is: 1. The firm first increases all inputs proportionately. 2. Larger-scale production improves coordination and efficiency. 3. Output increases by a greater proportion than the increase in inputs. This is the defining feature of IRS. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Efficiency improvements occur after scaling inputs.
�� Option C → Output cannot increase before inputs are expanded.
�� Option D → Efficiency improvements logically occur before observing the larger output.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the events according to the production process.

Final Logic:

Increase Inputs → Better Coordination → More-than-Proportionate Output.

🧠 Memory Trick

Scale → Efficiency → Extra Output

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale

6 The IRS inequality f(tx1, tx2) > t.f(x1, x2) implies which of the following concerning average metrics?
1. Average cost must be falling.
2. Cost incurred increases by a lesser proportion than output.
3. Marginal cost is greater than average cost.

A 1, 2, and 3

B 2 and 3 only

C 1 and 3 only

D 1 and 2 only

💡 Short Explanation

�� IRS means output increases more than proportionately. �� Average cost falls due to economies of scale. �� LRMC remains below LRAC during this phase.

✅ Correct Answer Explanation

Under Increasing Returns to Scale (IRS), output increases by a greater proportion than the increase in all inputs. Therefore, the firm's production becomes more efficient. Statement 1 is correct because LRAC falls under IRS. Statement 2 is correct because costs rise less proportionately than output. Statement 3 is incorrect because during the falling LRAC phase, LRMC is less than LRAC, not greater. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

�� Option A → All three statements are not correct because Statement 3 is false.
�� Option B → Statement 3 is incorrect since LRMC is below LRAC during IRS.
�� Option C → Includes incorrect Statement 3.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement individually using NCERT concepts on IRS and LRAC.

Final Logic:

IRS ⇒ Falling LRAC ⇒ LRMC < LRAC.

🧠 Memory Trick

IRS = Lower Average Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Increasing Returns to Scale and LRAC

7 Place the phases of DRS cost impact in the correct chronological flow:
1. Inputs are scaled by a factor t.
2. Output expands by a factor less than t.
3. Long Run Average Cost (LRAC) registers an increase.
4. Proportional input costs outpace proportional output growth.

A 1 → 4 → 2 → 3

B 1 → 2 → 4 → 3

C 4 → 1 → 2 → 3

D 2 → 1 → 3 → 4

💡 Short Explanation

�� Inputs increase first. �� Output grows less proportionately. �� Costs rise faster than output.

✅ Correct Answer Explanation

Under Decreasing Returns to Scale (DRS): 1. The firm first scales all inputs. 2. Output increases by a smaller proportion. 3. Input costs become proportionately larger than output. 4. Consequently, Long Run Average Cost rises. Thus, the correct sequence is: 1 → 2 → 4 → 3 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Cost imbalance occurs only after observing lower output growth.
�� Option C → Costs cannot outpace output before scaling occurs.
�� Option D → Output cannot increase before inputs are scaled.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Arrange the economic events according to NCERT production logic.

Final Logic:

Scale Inputs → Smaller Output Gain → Higher Cost → Rising LRAC.

🧠 Memory Trick

Scale → Less Output → Higher Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Decreasing Returns to Scale

8 Match the production function transformations to their DRS conditions.

List I	List II
1. t^(α + β) < t	a. Cobb-Douglas DRS representation
2. f(tx₁, tx₂) < t·q₀	b. General Function DRS condition
3. α + β < 1	c. Decreasing Returns to Scale (DRS) condition
4. Output increases less than proportionately when all inputs increase	d. Characteristic of Decreasing Returns to Scale

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-a, 3-d, 4-c

C 1-a, 2-b, 3-d, 4-c

D 1-b, 2-b, 3-c, 4-a

💡 Short Explanation

�� Cobb-Douglas uses the sum of exponents to identify Returns to Scale. �� General production functions express DRS through inequalities. �� DRS means output increases less than proportionately to inputs.

✅ Correct Answer Explanation

According to NCERT, Decreasing Returns to Scale (DRS) occurs when all inputs are increased by the same proportion but output increases by a smaller proportion. 1 → a For the Cobb-Douglas production function, Q = A L^α K^β DRS exists when α + β < 1 which implies t^(α + β) < t. Therefore, 1 → a. 2 → b For a general production function, f(tx₁, tx₂) < t·q₀ represents Decreasing Returns to Scale because output increases by less than t times. Therefore, 2 → b. 3 → c The condition α + β < 1 is the mathematical criterion for Decreasing Returns to Scale in the Cobb-Douglas production function. Therefore, 3 → c. 4 → d The defining characteristic of Decreasing Returns to Scale is that output increases less than proportionately when all inputs are increased proportionately. Therefore, 4 → d. Thus, the correct matching is: 1 → a 2 → b 3 → c 4 → d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrect because the Cobb-Douglas and general function representations are interchanged.
�� Option C → Incorrect because α + β < 1 is the DRS condition, not merely a characteristic.
�� Option D → Incorrect because both mathematical representations are incorrectly matched.

🎯 Strategy

Used: Option Grouping

Application:

Identify which mathematical expression belongs to the Cobb-Douglas production function and which belongs to the general production function, then match them with the NCERT definition of DRS.

Final Logic:

Exponent Form → Cobb-Douglas.
Function Inequality → General Production Function.
α + β < 1 → DRS.
Output Increases Less than Inputs → DRS Characteristic.

🧠 Memory Trick

Less Than One → DRS

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Returns to Scale; Cobb-Douglas Production Function; Decreasing Returns to Scale (DRS)

9 Match the exponent pairs in q = x1^alpha × x2^beta to their resultant scale nature:

List I	List II
P. alpha = 0.6, beta = 0.4	1. Exponent Summation implies IRS
Q. alpha = 0.7, beta = 0.5	2. Exponent Summation implies DRS
R. alpha = 0.2, beta = 0.7	3. Exponent Summation implies CRS

A P-1, Q-2, R-3

B P-3, Q-1, R-2

C P-3, Q-2, R-1

D P-2, Q-1, R-3

💡 Short Explanation

�� Sum = 1 → CRS. �� Sum > 1 → IRS. �� Sum < 1 → DRS.

✅ Correct Answer Explanation

Calculate each exponent sum: P: 0.6 + 0.4 = 1 ⇒ CRS. Q: 0.7 + 0.5 = 1.2 ⇒ IRS. R: 0.2 + 0.7 = 0.9 ⇒ DRS. Therefore, P → 3 Q → 1 R → 2 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Incorrectly classifies CRS and IRS.
�� Option C → Misclassifies IRS and DRS.
�� Option D → Incorrect mapping of exponent sums.

🎯 Strategy

Used

Substitution

Application:

Simply add the exponents and compare with 1.

Final Logic:

Sum = 1 ⇒ CRS
Sum > 1 ⇒ IRS
Sum < 1 ⇒ DRS

🧠 Memory Trick

Below = DRS

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cobb-Douglas Returns Classification

10 For the Cobb-Douglas Algebraic Returns Classification q = t^(alpha+beta) × x1^alpha × x2^beta, which statements are analytically correct?
1. If alpha + beta = 1, scaling inputs by 2 yields exactly twice the output.
2. The firm is always restricted to CRS regardless of alpha and beta.
3. alpha + beta > 1 represents a situation where long-run average cost is falling.

A 1 and 3 only

B 1 and 2 only

C 2 and 3 only

D 1, 2, and 3

💡 Short Explanation

�� Sum = 1 gives CRS. �� Sum > 1 gives IRS. �� IRS leads to falling LRAC.

✅ Correct Answer Explanation

Statement 1 is correct because when alpha + beta = 1, doubling inputs doubles output. Statement 2 is incorrect because the type of Returns to Scale depends on the value of alpha + beta, not always CRS. Statement 3 is correct because alpha + beta > 1 implies IRS, which causes the Long Run Average Cost to fall. Therefore, the correct answer is Option A.

❓ Why Other Options Are Incorrect

�� Option B → Statement 2 is false.
�� Option C → Statement 2 is false while Statement 1 is true.
�� Option D → Statement 2 makes the option incorrect.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement separately using the exponent-sum rule.

Final Logic:

alpha + beta determines the type of Returns to Scale.

🧠 Memory Trick

Sum Rules Everything

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cobb-Douglas Production Function and Returns to Scale

11 A firm's sequential scale transition maps directly onto the LRAC curve such that its initial __________ phase matches the downward-sloping segment of the curve.

A IRS

B CRS

C DRS

D Constant Cost

💡 Short Explanation

�� The LRAC initially slopes downward. �� This stage reflects Increasing Returns to Scale. �� Economies of scale reduce average cost.

✅ Correct Answer Explanation

In the long run, a typical firm passes through three stages: Increasing Returns to Scale (IRS) initially Constant Returns to Scale (CRS) at the minimum point Decreasing Returns to Scale (DRS) after further expansion The downward-sloping portion of the Long Run Average Cost (LRAC) curve represents IRS, because output increases more than proportionately to inputs, reducing average cost. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → CRS occurs only at the minimum point of the LRAC curve, not on the downward-sloping portion.
�� Option C → DRS corresponds to the upward-sloping portion of LRAC.
�� Option D → "Constant Cost" is not the stage identified by NCERT.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Associate each Returns to Scale stage with the corresponding segment of the LRAC curve.

Final Logic:

Downward LRAC ⇒ IRS.

🧠 Memory Trick

Downward LRAC = IRS

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Scale Transition and LRAC Curve

12 Arrange the correlation of Marginal and Average costs corresponding to the IRS -> CRS -> DRS transition:
1. LRMC cuts LRAC from below.
2. LRMC is less than LRAC.
3. LRMC is greater than LRAC.

A 1 -> 2 -> 3

B 2 -> 1 -> 3

C 3 -> 1 -> 2

D 2 -> 3 -> 1

💡 Short Explanation

�� During IRS, LRMC is below LRAC. �� At CRS, LRMC equals LRAC. �� During DRS, LRMC exceeds LRAC.

✅ Correct Answer Explanation

The relationship between LRMC and LRAC follows this sequence: During IRS, LRAC falls because LRMC < LRAC. At CRS, LRMC cuts LRAC from below at its minimum point. During DRS, LRMC becomes greater than LRAC, causing LRAC to rise. Therefore, the correct sequence is: 2 → 1 → 3 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRMC first remains below LRAC before intersecting it.
�� Option C → LRMC cannot begin above LRAC during IRS.
�� Option D → LRMC does not become greater before intersecting LRAC.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the standard LRMC-LRAC relationship shown in the NCERT graph.

Final Logic:

Below → Equal → Above.

🧠 Memory Trick

Below → Equal → Above

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC and LRAC Relationship

13 Assertion (A): Proportionate input requirements under DRS mandate that to achieve a 100% output boost, the input cost must rise by more than 100%.
Reason (R): Under DRS, input scaling is inefficient, requiring inputs to be scaled by a higher multiplier t' > 2 to hit a targeted output multiplier of t = 2.

A Both A and R are true but R is not the correct explanation of A

B Both A and R are true and R is the correct explanation of A

C A is true but R is false

D A is false but R is true

💡 Short Explanation

�� DRS requires proportionately more inputs. �� Costs increase faster than output. �� Average cost rises.

✅ Correct Answer Explanation

Under Decreasing Returns to Scale, output increases by a smaller proportion than inputs. Therefore, to double output (100% increase), the firm must increase inputs by more than double. Since additional inputs must be purchased, total cost rises by more than the increase in output, causing Long Run Average Cost to rise. The Reason correctly explains the Assertion. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → The Reason directly explains the Assertion.
�� Option C → Both statements are correct.
�� Option D → The Assertion is also correct.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Relate DRS directly to higher input requirements and higher costs.

Final Logic:

DRS ⇒ More Inputs ⇒ Higher Cost.

🧠 Memory Trick

Double Output? More than Double Inputs!

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Input Requirements under DRS

14 When analyzing Input Doubling Effects under IRS, the cost that the firm incurs to hire those inputs will __________, resulting in a lower per-unit cost.

A precisely double

B increase by less than double

C increase by more than double

D stay constant

💡 Short Explanation

�� IRS creates economies of scale. �� Inputs required increase less proportionately. �� Average cost falls.

✅ Correct Answer Explanation

Under Increasing Returns to Scale (IRS), output increases by a greater proportion than inputs. To double output, the firm needs less than double the amount of inputs. Consequently, the cost of hiring those inputs also increases by less than double, leading to a lower average cost per unit. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → Exactly doubling cost represents CRS.
�� Option C → More than doubling cost occurs under DRS.
�� Option D → Cost cannot remain unchanged when production expands.

🎯 Strategy

Used

Elimination

Application:

Identify which option matches the cost implications of IRS.

Final Logic:

IRS ⇒ Less Input Growth ⇒ Less Cost Growth.

🧠 Memory Trick

IRS = Less Cost to Grow

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Cost Implications of Increasing Returns to Scale

15 Match the scale cost implications to the firm's LRMC trajectory.

List I	List II
1. IRS Cost Reductions Phase	a. LRMC forces LRAC to slope upwards
2. DRS Cost Increases Phase	b. LRMC pulls LRAC downwards
3. LRMC is less than LRAC	c. LRAC declines
4. LRMC is greater than LRAC	d. LRAC rises

A 1-b, 2-a, 3-c, 4-d

B 1-a, 2-b, 3-d, 4-c

C 1-a, 2-a, 3-c, 4-d

D 1-b, 2-b, 3-d, 4-c

💡 Short Explanation

�� Increasing Returns to Scale (IRS) reduce average cost. �� Decreasing Returns to Scale (DRS) increase average cost. �� The position of LRMC relative to LRAC determines the direction of LRAC.

✅ Correct Answer Explanation

According to NCERT, the relationship between Long Run Marginal Cost (LRMC) and Long Run Average Cost (LRAC) determines whether the LRAC curve falls or rises. 1 → b During the Increasing Returns to Scale (IRS) phase, LRMC is less than LRAC. As a result, LRMC pulls LRAC downward. Therefore, 1 → b. 2 → a During the Decreasing Returns to Scale (DRS) phase, LRMC becomes greater than LRAC. Consequently, LRMC pushes LRAC upward. Therefore, 2 → a. 3 → c When LRMC is less than LRAC, each additional unit costs less than the average cost, causing LRAC to decline. Therefore, 3 → c. 4 → d When LRMC exceeds LRAC, each additional unit costs more than the average cost, causing LRAC to rise. Therefore, 4 → d. Thus, the correct matching is: 1 → b 2 → a 3 → c 4 → d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Incorrect because the IRS and DRS relationships are reversed.
�� Option C → Incorrect because IRS cannot cause LRAC to rise, and DRS cannot cause LRAC to fall.
�� Option D → Incorrect because both phases are incorrectly associated with falling LRAC.

🎯 Strategy

Used: Option Grouping

Application:

Match each phase of Returns to Scale with the corresponding relationship between LRMC and LRAC described in NCERT.

Final Logic:

IRS → LRMC < LRAC → LRAC Falls.
DRS → LRMC > LRAC → LRAC Rises.

🧠 Memory Trick

DRS → Pushes Up

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Relationship between Long Run Marginal Cost (LRMC) and Long Run Average Cost (LRAC) under Returns to Scale

16 Which of the following analytical statements about DRS Cost Increases is/are true?
1. DRS causes a less-than-proportional jump in output compared to inputs.
2. It directly causes the Long Run Average Cost to be upward rising.
3. It coincides with the phase where LRMC < LRAC.

A 2 and 3 only

B 1 and 2 only

C 1 and 3 only

D 1, 2, and 3

💡 Short Explanation

�� DRS means output rises less than inputs. �� LRAC rises under DRS. �� LRMC exceeds LRAC during this phase.

✅ Correct Answer Explanation

Under Decreasing Returns to Scale (DRS), increasing all inputs by a certain proportion results in output increasing by a smaller proportion. Therefore, Statement 1 is correct. Because more inputs are required for each additional unit of output, Long Run Average Cost (LRAC) rises, making Statement 2 correct. Statement 3 is incorrect because when LRAC is rising, LRMC is greater than LRAC, not less. Hence, the correct answer is Option B (1 and 2 only).

❓ Why Other Options Are Incorrect

�� Option A → Statement 3 is incorrect because LRMC > LRAC during DRS.
�� Option C → Includes incorrect Statement 3.
�� Option D → All three are not correct because Statement 3 is false.

🎯 Strategy

Used

Option Grouping

Application:

Evaluate each statement individually using the NCERT explanation of DRS and LRAC.

Final Logic:

DRS ⇒ Output grows less than inputs ⇒ LRAC rises ⇒ LRMC > LRAC.

🧠 Memory Trick

DRS = Rising Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Decreasing Returns to Scale and LRAC

17 What is precisely true at the Minimum Point Observations on the LRAC curve?

A The firm transitions from DRS back to IRS

B LRMC equals LRAC, and Constant Returns to Scale is observed

C Marginal product is at its absolute peak

D Variable costs are eliminated

💡 Short Explanation

�� LRAC is minimum. �� LRMC intersects LRAC. �� CRS exists at this point.

✅ Correct Answer Explanation

According to NCERT, the minimum point of the LRAC curve represents Constant Returns to Scale (CRS). At this point: LRMC = LRAC. Average cost is minimum. The firm shifts from IRS to DRS. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → The transition is from IRS to DRS, not DRS to IRS.
�� Option C → Marginal product is a short-run concept and is unrelated here.
�� Option D → Variable costs always exist in production.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the standard LRMC-LRAC relationship.

Final Logic:

Minimum LRAC ⇒ LRMC = LRAC ⇒ CRS.

🧠 Memory Trick

Minimum Cost = CRS

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Returns to Scale and LRAC

18 In the Constant Scale Regions, since proportional increase in inputs yields a proportional increase in output, the Long Run Average Cost (LRAC) inherently __________.

A remains constant

B drops to zero

C slopes upward

D forms an inverted U

💡 Short Explanation

�� CRS means proportional changes. �� Average cost remains unchanged. �� LRAC is flat at this point.

✅ Correct Answer Explanation

Under Constant Returns to Scale (CRS): Inputs and output increase by exactly the same proportion. Cost increases proportionately. Therefore, Long Run Average Cost remains constant. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

�� Option B → Average cost never becomes zero.
�� Option C → Upward slope represents DRS.
�� Option D → LRAC is U-shaped, not inverted U-shaped.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Recall the characteristics of CRS.

Final Logic:

Equal Input Growth = Equal Output Growth = Constant LRAC.

🧠 Memory Trick

CRS = Constant Cost

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Constant Returns to Scale

📄 Passage

"LRMC curve is therefore a 'U'-shaped curve. It cuts the LRAC curve from below at the minimum point of the LRAC. Figure 3.9 shows the shapes of the long run marginal cost and the long run average cost curves for a typical firm. LRAC reaches its minimum at q1. To the left of q1, LRAC is falling and LRMC is less than the LRAC curve."

Based on the passage, what shape characterizes the Long Run Marginal Cost (LRMC) curve?

A Downward straight line

B Rectangular hyperbola

C U-shaped curve

D Horizontal line

💡 Short Explanation

�� LRMC is U-shaped. �� It cuts LRAC at its minimum. �� It reflects long-run cost behaviour.

✅ Correct Answer Explanation

The passage explicitly states that the Long Run Marginal Cost (LRMC) curve is U-shaped. Initially, LRMC falls due to economies of scale. Later, it rises because of diseconomies of scale. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRMC is not a straight-line curve.
�� Option B → A rectangular hyperbola represents different economic relationships.
�� Option D → LRMC changes with output and is not horizontal.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the exact wording from the passage.

Final Logic:

Passage directly states LRMC is U-shaped.

🧠 Memory Trick

LRMC Looks Like U

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: Long Run Marginal Cost Curve

📄 Passage

Geometrically linking the IRS curve correlation, if the firm operates at an output level to the left of q1, which relationship mathematically holds?

A LRMC > LRAC

B LRMC < LRAC

C LRMC = LRAC

D LRMC = 0

💡 Short Explanation

�� Left of q1 represents IRS. �� LRAC is falling. �� LRMC remains below LRAC.

✅ Correct Answer Explanation

According to the passage and NCERT: To the left of q1, the firm experiences Increasing Returns to Scale (IRS). During this stage, LRAC falls. Whenever average cost is falling, LRMC must remain below LRAC. Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

�� Option A → LRMC exceeds LRAC only when LRAC is rising.
�� Option C → LRMC equals LRAC only at the minimum point q1.
�� Option D → LRMC is not zero.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

Use the passage statement relating LRMC and LRAC to the left of q1.

Final Logic:

Left of q1 ⇒ Falling LRAC ⇒ LRMC < LRAC.

🧠 Memory Trick

Left of Minimum = MC Below AC

📚 Class XI – Introductory Microeconomics – Chapter: Production and Costs – Topic: LRMC–LRAC Relationship and Returns to Scale

CUET UG Economics Booster Test 3 - Returns to Scale

Test Complete!

Answer Review