Question

Given below are two statements:
Statement I: On the two dimensional graph, output is a function of cost, $Y = f(C)$, ceteris paribus.
Statement II: At quantities smaller than the break-even point, there is a loss and at larger quantities there is a profit.
In the light of the above statements, choose the most appropriate answer from the options below:

• A. Both statements I and II are true
• B. Both statements I and II are false
• C. Statement I is correct but statement II is false
• D. Statement I is incorrect but statement II is true

Hint:

Cost is the dependent variable of output. You decide the level of output ($Y$), which then determines the total cost ($C$). Thus, the proper cost function is $C = f(Y)$.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
Production theory and cost theory analyze how inputs translate into outputs, and how those outputs determine the financial performance of a firm.

Step 2: Detailed Explanation:
Let us evaluate each statement:
- Statement I: In microeconomics, a production function expresses output ($Y$) as a function of input physical quantities ($X$), i.e., $Y = f(X_1, X_2...)$. Cost, on the other hand, is theoretically formulated as a function of output, $C = f(Y)$, because cost depends on the level of production, not the other way around. Thus, Statement I is technically incorrect.
- Statement II: The break-even point is the level of production where Total Revenue ($TR$) equals Total Cost ($TC$), resulting in zero economic profit. At any output level smaller than this point, $TC > TR$, resulting in a financial loss. At quantities larger than this point, $TR > TC$, yielding a net profit. Thus, Statement II is correct.

Step 3: Final Answer:
Statement I is incorrect but Statement II is correct, matching Option (D).