Question

Which of the following is true of the cost of production under the rule of "ceteris paribus?" I.a firm produces goods by combining land, labor, natural resources and entrepreneurship. II. In the short run at least one factor of production is fixed. III. When one factor of production is fixed, the firm will experience marginal diminishing returns. IV. With good management, all costs of production can be controlled and the firm will always experience long run profits. IV only I only II and III II and IV I, II and IV I, II and III

Answer 1

I. A firm manufactures goods through the combination of land, labour, entrepreneurship and capital resources.

II. In the short run, at least one production factor is fixed.

III. When one production factor is held constant, the firm will experience marginal diminishing returns

Option I, II and III are correct.

Step-by-step explanation:

Ceteris paribus means other things held constant. The cost of production means the cost used for the manufacturing of a good or service. For the production of any good or service, the factors of production (land, labour, capital, entrepreneurship)and natural resources are used.

The short run is the period whereby at least a production factor usually capital is fixed. It is in the long run that every production factors are variable. The short run is usually a period lower than six months.

Increasing output in the short run albeit at least one production factor is constant e.g. capital and labour will result into diminishing marginal returns. For example, if a company hires more workers though the same office is still used, there will be a rise in total output but an additional worker will manufacture less outputs than the previous worker. This will actually lead to decrease in output at a certain point.

A good management doesn't necessarily mean cost can be controlled. There are fixed costs and variable costs. Variable costs tend to vary with production.

Therefore, option I, II and III are correct.