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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

In the short run, a firm in Pune running a software-testing unit keeps its office space and servers fixed and hires additional testers. Which statement correctly describes the short-run production function in this case?

The short-run production function links output to variable inputs while at least one input, such as office space or servers, stays fixed. Only the long run allows all inputs to change, which is when returns to scale become relevant.

  1. AAll inputs, including office space, can be varied so output responds proportionately
  2. BOutput depends on varying at least one input while at least one other input is fixedCorrect
  3. COutput is determined by the number of firms in the industry, not by inputs
  4. DThe firm can only experience constant returns to scale
  5. Average cost must be falling because inputs are fixed

Explanation

The short run is defined as a period in which at least one factor is fixed while others vary. Option 0 describes the long run. Returns to scale concern changing all inputs, so they do not apply to the short run, which rules out the constant-returns option.

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