Question

Given below are two statements:
Statement (I): So long as MPP increases, APP will also increase and it will continue to do so even though MPP starts to fall so long as MPP is greater than APP.
Statement (II): The value of MVP declines throughout stage II, but nevertheless, it will pay to intensify production so long as the MVP of the input is less than the cost of a unit of input.
In light of the above statements, choose the most appropriate answer from the options given below:

• A. Both Statement (I) and Statement (II) are true.
• B. Both Statement (I) and Statement (II) are false.
• C. Statement (I) is true but Statement (II) is false.
• D. Statement (I) is false but Statement (II) is true.

Hint:

Remember the optimization rule: profit is maximized when Marginal Value Product equals the unit price of the input ($MVP = P_x$). It is profitable to expand input use as long as $MVP > P_x$.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
This question evaluates the mathematical relationships among Marginal Physical Product (MPP), Average Physical Product (APP), Marginal Value Product (MVP), and input price ($P_x$) in production theory.

Step 3: Detailed Explanation:
Let us analyze each statement carefully:
- Statement (I): According to production theory:
When $MPP > APP$, the APP curve is rising.
When $MPP < APP$, the APP curve is falling.
When $MPP = APP$, the APP curve is at its maximum.
Even when MPP starts to fall after reaching its peak, APP will continue to rise as long as the falling MPP value remains greater than the current APP value ($MPP > APP$). Thus, Statement (I) is true.
- Statement (II): The Marginal Value Product ($MVP$) is the marginal product multiplied by product price ($MVP = MPP \times P_y$). Since MPP declines throughout Stage II due to diminishing returns, MVP also declines.
To maximize profits, a producer should add units of a variable input up to the point where the cost of a unit of input ($P_x$) equals its marginal revenue contribution ($MVP = P_x$).
Therefore, it pays to intensify production as long as the MVP is greater than the cost of the input. If $MVP < P_x$, the cost of an additional unit of input is greater than the revenue it generates, leading to a loss. Thus, Statement (II) is incorrect.

Step 4: Final Answer:
Statement (I) is true but Statement (II) is false, corresponding to option (C).