The total variable cost (TVC) of a firm is Rs 30 for 1 unit, Rs 50 for 2 units and Rs 60 for 3 units of output. Which of the following is correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The SMC of the 3rd unit (Rs 10) is less than the AVC at 2 units (Rs 25), so AVC falls to Rs 20.
Given:
TVC = Rs 30, 50, 60 for 1, 2, 3 units
In the short run, SMC is the rise in TVC, and AVC = TVC / q.
\( SMC_3 = 60 - 50 = 10 \)
\( AVC_2 = 50 / 2 = 25 \)
\( AVC_3 = 60 / 3 = 20 \)
SMC (Rs 10) is below AVC (Rs 25), so it pulls the average down to Rs 20.
Option (1) The SMC of the 3rd unit (Rs 10) is less than the AVC at 2 units (Rs 25), so AVC rises to Rs 30. — Incorrect. An SMC below AVC makes AVC fall, not rise.
Option (2) The SMC of the 3rd unit (Rs 10) is less than the AVC at 2 units (Rs 25), so AVC falls to Rs 20. — Correct. Both values and the direction match the working.
Option (3) The SMC of the 3rd unit (Rs 60) is more than the AVC at 2 units (Rs 25), so AVC rises. — Incorrect. Rs 60 is the TVC of 3 units, not the SMC.
Option (4) The SMC of the 3rd unit (Rs 20) equals the AVC at 3 units, so AVC is at its minimum. — Incorrect. SMC of the 3rd unit is Rs 10, and AVC at 3 units is Rs 20; they are not equal.
NCERT (2026-27): “3.7.1 Short Run Costs … Just like the case of marginal product, marginal cost also is undefined at zero level of output. It is important to note here that in the short run, fixed cost cannot be changed. When we change the level of output, whatever change occurs to total cost is entirely due to the change in total variable cost. So in the short run, marginal cost is the increase in TVC due to increase in production of one extra unit of output.” “Shapes of the Short Run Cost Curves … As long as AVC is falling, SMC must be less than the AVC. As AVC rises, SMC must be greater than the AVC. So the SMC curve cuts the AVC curve from below at the minimum point of AVC.” |