NCERT Solutions Class 12 Economics Chapter 3 Cost

Question. The MC Curve cuts the AVC and ATC Curves
(a) At the falling part of each.
(b) At different points.
(c) At their respective minimas.
(d) At the rising part of each.
Answer: C

Question. Which of the following describes the behaviour of Average Fixed Cost?
(a) Remains constant throughout all output levels
(b) Declines throughout as output increases
(c) Declines first, reaches its minimum and then rises
(d) Rises first, reaches a maximum and then declines
Answer: B

Question. Which of the following statements is correct concerning the relationships among the Firm's Costs?
(a) TC = TVC X TFC
(b) TC = TFC — TVC
(c) TC = TVC — TFC
(d) TC = TFC+ TVC
Answer: D

Question. The AVC Curve passes through the Origin. This statement is —
(a) True
(b) False
(c) Partially True
(d) Nothing can be said
Answer: B

Question. Which of the following statements is correct concerning the relationships among the Firm's Costs?
(a) TC = TFC — TVC
(b) TVC = TFC TC
(c) TFC = TC TVC
(d) TC = TVC TFC
Answer: C

Question. Which of the following statements is correct?
(a) When Average Cost is rising, Marginal Cost must also be rising
(b) When Average Cost is rising, Marginal Cost must be falling
(c) When Average Cost is rising, Marginal Cost is above the Average Cost
(d) When Average Cost is falling, Marginal Cost must be rising
Answer: C

Question. If TVC = 1,000, TFC = 400, then calculate ATC at 5 units.
(a) 280
(b) 250
(c) 150
(d) 300
Answer: A

Question. TVC Curve will be a —
(a) Curve with a positive slope
(b) Curve with a negative slope
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer: A

Question. Which curve is downward sloping and does not touch the X-axis?
(a) AVC
(b) MC
(c) ATC
(d) AFC
Answer: D

Question. "I am making a loss, but with the rent I have to pay, I can't afford to shut down at this point of time." If this entrepreneur is attempting to maximize profits or minimize losses, his behaviour in the short run is:
(a) rational, if the firm is covering its variable cost.
(b) rational, if the firm is covering its fixed costs.
(c) irrational, since plant closing is necessary to eliminate losses.
(d) irrational, since fixed costs are eliminated if a firm shuts down
Answer: A

Question. If Variable Cost per unit (i.e. AVC) is constant at all levels of output, NC Curve will be —
(a) Curve with positive slope
(b) Straight Line with positive slope
(c) Rectangular Hyperbola
(d) None of these
Answer: B

Question. Average Variable Cost Curve is —
(a) Exactly a U Shaped Curve
(b) Not exactly a U Shaped Curve
(c) Straight line
(d) Not depicted in the Graph at all
Answer: B

Question. The relationship between the AC and MC is that
(a) MC will always be less than the AC
(b) MC will be more than AC when MC is falling
(c) AC may be more than MC when MC is rising
(d) None of the above
Answer: C

Question. TVC Curve will be —
(a) Higher than the NC Curve
(b) Lower than the NC Curve
(c) Paral lel to X Axis
(d) Paral lel to Y Axis
Answer: A

Question. Which of the following statements is true of the relationship among the Average Cost Function?
(a) ATC = AFC — AVC
(b) AVC = AFC + ATC
(c) AFC = ATC + AVC
(d) AFC = ATC AVC
Answer: D

Question. TFC Curve will commence from —
(a) A certain point on the Quantity Axis (X Axis)
(b) A certain point on the Cost Axis (Y Axis)
(c) Origin
(d) Any of the above
Answer: B

Question. When MC Curve intersects AC Curve, it means that
(a) MC is minimum
(b) AC is minimum
(c) Both MC and AC are minimum
(d) Nothing can be said
Answer: B

Question. Beyond certain output level, when there is an increase in Average Variable Cost (AVC), Average Cost (AC) also increases due to the reason that —
(a) Fall in AFC is less than the sharp rise in AVC
(b) Fall in AFC is greater than the sharp rise in AVC
(c) Fall in AFC is equal to the rise in AVC
(d) None of the above
Answer: A

Question. TC Curve will commence from —
(a) A certain point on the Quantity Axis (X Axis)
(b) A certain point on the Cost Axis (Y Axis)
(c) Origin
(d) Any of the above
Answer: B

Question. All of the following are U—Shaped Curves except the—
(a) AVC Curve
(b) AFC Curve
(c) AC Curve
(d) MC Curve
Answer: B

Question. The Average Fixed Cost —
(a) Remains the same whatever the level of output
(b) Increase as output increases
(c) Diminishes as output increases
(d) All of the above
Answer: C

Question. In the short run, when the output of a Firm decreases, its Average Fixed Cost —
(a) Increases
(b) Decreases
(c) Remains constant
(d) First declines and then rises
Answer: A

Question. Average Fixed Cost (AFC) of a Firmis ................ related to its output.
(a) Directly
(b) Inversely
(c) Proportionately
(d) Not
Answer: B

Question. Which of the following describes the behaviour of Average Fixed Cost Curve?
(a) Declines first, reaches its minimum and then rises
(b) Rises first, reaches a maximum and then declines
(c) Remains constant throughout all output levels
(d) Declines throughout as output increases
Answer: D

Question. NC Curve will —
(a) Increase, i.e. slope upward from left to right
(b) Decrease, i.e. slope downward from left to right
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer: A

Question. Which of the following is true with respect to Average Fixed Cost?
(a) It is a bell shaped Curve
(b) As the quantity increases it approaches zero
(c) If quantity produced tends to zero, Average Fixed Cost approaches infinity
(d) Both (b) and (c) above
Answer: D

Question. The Vertical difference between TVC and TC is equal to—
(a) M C
(b) AVC
(c) TFC
(d) None of these
Answer: C

Question. AFC Curve will be a —
(a) Curve with a positive slope
(b) Curve with a negative slope
(c) Straight Line
(d) None of the above
Answer: B

Question. Which of the following is true of the relationship between Marginal Cost and Average Cost Functions?
(a) If MC is greater than AC, then AC is falling
(b) AC Curve intersects the MC Curve at minimum MC
(c) MC Curve intersects the AC Curve at minimum AC
(d) If MC is less than AC, then AC is increasing
Answer: C

Question. Upto Normal Capacity of output, as output increases, AVC will —
(a) Remain constant
(b) Decrease
(c) Increase
(d) Nothing can be said
Answer: B

Question. The Average Fixed Cost Curve of a Firm —
(a) Is parallel to the Horizontal Axis
(b) Is parallel to the Vertical Axis
(c) Is a `U' Shaped Curve
(d) Is a Downward Sloping Curve from left to right
Answer: D

Question. TFC Curve will be a —
(a) Cur v e
(b) Straight Line
(c) Rectangular Hyperbola
(d) None of these
Answer: B

Question. Initially, even when there is an increase in Average Variable Cost (AVC), Average Cost (AC) may still decline due to the reason that —
(a) Fall in AFC is less than the rise in AVC
(b) Fall in AFC is greater than the rise in AVC
(c) Fall in AFC is equal to the rise in AVC
(d) None of the above
Answer: B

Question. When AC increases as a result of an increase in output
(a) MC = AC
(b) MC < AC
(c) MC > AC
(d) Nothing can be said
Answer: C

Question. Average Fixed Cost (AFC) equals —
(a) ATC — AVC
(b) TFC divided by Output Quantity
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer: C

Question. Which of the following statements regarding Output is false?
(a) Output is under the control of the Firm
(b) Magnitude of the Output determines the Total Cost of Production
(c) Change in output level determines the rate of change in the Total Cost of Production
(d) Output has no role to play in determining the Cost Function
Answer: D

Question. Marginal Cost Curve cuts the Average Cost Curve —
(a) At the left to its lowest point
(b) At its lowest point
(c) At the right to its lowest point
(d) Any of the above
Answer: B

Question. Marginal Cost is —
(a) Always less than the Average Cost
(b) Always more than the Average Cost
(c) Equal to the Average Cost at its minimum point
(d) Never equal to Average Cost
Answer: C

Question. NC Curve will commence from —
(a) A certain point on the Quantity is (X Axis)
(b) A certain point on the Cost Axis (Y Axis)
(c) Origin
(d) Any of the above
Answer: C

Question. AVC decreases as output increases —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: A

Question. Which of the following is the Average Cost?
(a) Average Fixed Cost + Average Variable Cost
(b) Average Total Cost
(c) Total Cost divided by the number of units
(d) All of the above
Answer: D

Question. AFC curve is always ___
(a) U-shaped if there is decreasing returns to scale
(b) U-shaped if there is increasing returns to scale.
(c) Declining when output increases.
(d) Intersected by M.0 at its minimum point refer back
Answer: C

Question. AFC Curve —
(a) Will touch the Quantity Axis (X Axis)
(b) Will touch the Cost Axis (Y Axis)
(c) Will touch both Axes
(d) Will not touch any Axis.
Answer: D

Question. When, we know that the Firms must be producing at the minimum point of the Average Cost Curve and so there will be productive efficiency.
(a) AC = AR
(b) MC = AC
(c) MC = MR
(d) AR = MR
Answer: B

Question. A Firm's average fixed Cost id 20 at 6 units of output. What will it be at 4 units of output?
1. 60
2. 30
3. 40
4. 20
Answer: B

Question. AVC increases as output increases, beyond normal capacity output, due to —
(a) Law of Constant Returns
(b) Law of Diminishing Returns
(c) Law of Increasing Returns
(d) Law of Equi—Marginal Utility
Answer: B

Question. TC Curve will be a —
(a) Curve with a positive slope
(b) Curve with a negative slope
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer: A

Question. MC Curve is lower than AC, when —
(a) AC decreases
(b) AC increases
(c) AC is at its minimum
(d) Nothing can be said
Answer: A

Question. TFC Curve will be a straight line
(a) Parallel to X—Axis
(b) Parallel to Y—Axis
(c) Increasing from left to right
(d) Decreasing from left to right
Answer: A

Question. Which of the following Cost Curves is never 'Li' shaped?
(a) Average Cost Curve
(b) Marginal Cost Curve
(c) Average Variable Cost Curve
(d) Average Fixed Cost Curve
Answer: D

Question. Average Variable Cost Curve has a negative slope —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: A

Question. The AFC Curve passes through the Origin. This statement is —
(a) True
(b) False
(c) Partially True
(d) Nothing can be said
Answer: B

Question. If Output increases in the short—run, Total Cost will —
(a) Increase due to an increase in Fixed Costs only
(b) Increase due to an increase in Variable Costs only
(c) Increase due to an increase in both Fixed and Variable Costs
(d) Decrease if the Firm is in the region of Diminishing Returns
Answer: B

Question. Average Variable Cost Curve has a positive slope —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: B

Question. When AC falls as a result of an increase in output —
(a) MC = AC
(b) MC < AC
(c) MC > AC
(d) Nothing can be said
Answer: B

Question. Average Variable Cost Curve slopes downwards —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: A

Question. Average Cost is the same as —
(a) Average Fixed Cost
(b) Average Total Cost
(c) Average Variable Cost
(d) All of the above
Answer: B

Question. AVC decreases as output increases, upto normal capacity output, due to —
(a) Law of constant returns
(b) Law of diminishing returns
(c) Law of increasing returns
(d) Law of negative returns
Answer: C

Question. TVC Curve will be —
(a) Higher than the TC Curve
(b) Lower than the TC Curve
(c) Parallel to X Axis
(d) Parallel to Y Axis
Answer: B

Question. AVC increases as output increases —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: B

Question. Average Cost (AC) equals —
(a) ATC + AFC
(b) Total Cost divided by Output Quantity
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer: C

Question. Initially Average Cost declines sharply due to the reason that —
(a) AFC declines significantly as output increases
(b) AVC declines significantly as output increases
(c) AFC increases as output increases
(d) AVC increases as output increases
Answer: A

Question. If the Firm's output level is below its short run capacity, it is its Plant and Machinery.
(a) Under util izing
(b) Fully utilizing
(c) Over utilizing
(d) Exploi ting
Answer: A

Question. Average Variable Cost Curve slopes upwards —
(a) Upto normal capacity output
(b) Beyond normal capacity output
(c) At all levels of output
(d) Nothing can be said
Answer: B

Question. TC Curve will —
(a) Increase, i.e. slope upward from left to right
(b) Decrease, i.e. slope downward from left to right
(c) Ei ther (a) or (b)
(d) Neither (a) nor (b)
Answer: A

Question. Average Variable Cost Curve —
(a) Slopes downwards at first and then upwards
(b) Slopes upwards, remains constant and then falls
(c) Slopes downwards always
(d) Remains a straight line parallel to X Axis
Answer: A

Question. Average Cost Curve is a —
(a) U Shaped Curve
(b) J Shaped Curve
(c) L Shaped Curve
(d) Straight Line
Answer: A

Question. Average total cost to firm is Z 600 when it produces 10 units of output and Z 640 when the output is 11 units. The MC of the 11th unit is
(a) 4 0
(b) 540
(c) 840
(d) 1040
Answer: D

Question. Beyond Normal Capacity of output, as output increases, AVC will —
(a) Remain constant
(b) Decrease
(c) Increase
(d) Nothing can be said
Answer: C

Question. Which statement among below is correct in reference to AFC?
(a) Never becomes zero
(b) Curve never touch X-axis
(c) Curve never touch Y-axis
(d) All of the these
Answer: D

Question. Average Variable Cost (AVC) equals —
(a) ATC — AFC
(b) TVC divided by Output Quantity
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer: C

Question. Average Cost Curve —
(a) Slopes downwards at first and then upwards
(b) Slopes upwards, remains constant and then falls Slopes downwards always
(c) Remains a straight line parallel to X Axis
Answer: A

Question. If a Firm's Average Variable Cost Curve is rising, its Marginal Cost Curve must be —
(a) Constant
(b) Above the Total Cost Curve
(c) Above the Average Variable Cost Curve.
(d) All of the above.
Answer: C

Question. Average Cost of Producing 50 units of a Commodity is 250 and fixed cost is 1000.
What will be the average fixed cost of producing 100 units of the Commodity?
1. 10
2. 30
3. 20
4. 5
Answer: A

Question. MC Curve cuts the AVC and ATC Curves —
(a) From above
(b) From below
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer: B

Question. The AC Curve and AVC Curve start increasing at the same output level only.
This statement is
(a) True
(b) Fal se
(c) Partially True
(d) Nothing can be said
Answer: B

Question. A firm produces 10 units of commodity at an average total cost of Z 200 and with a fixed cost of Z 500. Find out component of average variable cost in total cost.
(a) Z 300
(b) Z 200
(c) 150
(d) Z 100
Answer: C

Question. In the short run, when the output of a Firm increases, its Average Fixed Cost\--
(a) Increases
(b) Decreases
(c) Remains constant
(d) First declines and then rises
Answer: B

Question. When shape of Average Cost Curve is upward, Marginal Cost —
(a) Must be decreasing
(b) Must be constant
(c) Must be rising
(d) Any of the above
Answer: C

Question. The AC Curve passes through the Origin.
This statement is —
(a) True
(b) False
(c ) Partially True
(d) Nothing can be said
Answer: B

Question. Briefly explain the concept of the cost function. 
Answer:  Cost function shows functional relationship between output and cost of production. It gives the least cost combination of inputs corresponding to different levels of output. Cost function is given as:
C = f(X), ceteris paribus,
where, C = Cost and X = Output

Question. What are total fixed cost, total variable cost and total cost of a firm? How are they related?
Or
Draw TVC, TC, and TFC curves in a single diagram. 
Answer: (i) TC is divided into two parts TFC and TVC such that TC = TFC + TVC.
(ii) TFC is the overhead cost and it remains constant or fixed whatever be  the level of output. TFC curve is a horizontal line parallel to the x- xis.
(iii) TVC is cost due to increased use of variable factors like raw material, labour, etc. TVC is inverse S-shaped starting from the origin due to law of variable proportion.
(iv) TC is aggregate of TFC and TVC. TC curve is inverse S-shaped starting from the level of fixed cost. The reason behind it shape is the law of variable proportion.

Question. What are the average fixed cost, average variable cost and average cost of a firm? How are they related?
Answer: AFC: The per unit cost incurred on fixed factors of production is known as average fixed cost.
AFC= TFC/Q
AFC always decreases as the firm increases the level of production. AVC: It is variable cost per unit of output produced.

AC=TC/Q It is obtained by dividing the total variable cost by the quantity of output.
AVC initially decreases. But after reaching the stage of minimum cost it starts increasing.
AVC is U-Shaped. AC: It is cost per unit of output produced. It can be obtained by dividing the total cost by the quantity of output produced.
Relationship between AFC, AVC and AC. There is a unique relationship among AC, AFC and
AVC. AC is the sum of AFC and AVC, i.e.,
AC = AFC + AVC.

Question. Can there be some fixed cost in the long run? If not, why? 
Answer: No, there are no fixed costs in the long run as all the factors become variable. Fixed cost exists only in short run.

Question. What does the average fixed cost curve look like? Why does it look so?  Or
How does AFC behave as output is increased? 
Or
What is the behaviour of average fixed cost as output increases?
Answer: The shape of AFC is downward sloping Rectangular hyperbola. AFC falls as output increases because TFC=TFC/Q and TFC remains Output constant. So, as
output increases, TFC remains constant, but AFC falls.

Question. What do the short run marginal cost, average variable cost and short run average cost curves look like?
Answer: The Short run marginal cost, average variable cost and short run average cost curves are U-shaped because of Law of variable proportion.

Question. Why does SMC curve cut AVC curve at the minimum point of AVC curve?
Answer: (i) It happens because when AVC falls, SMC is less than AVC.
(ii) When AVC starts rising, SMC is more than AVC.
(iii) So, it is only when AVC is constant and at its minimum point, that SMC is equal to AVC.
Therefore, SMC curve cuts AVC curve at its minimum point.

Question. At which point does the SMC curve cut the SAC curve? Give reason in support of your answer.
Answer: (i) It happens because when SAC falls, SMC is less than SAC.
(ii) When SAC starts rising, SMC is more than SAC.
(iii) So, it is only when SAC is constant and at its minimum point, that SMC is equal to SAC.
Therefore, SMC curve cuts SAC curve at its minimum point.

Question. Why is the short run marginal cost curve U- Shaped? 
Answer: Marginal cost is U-shaped because of Law of variable proportion:

(i) As we know the shape of MC depends on the shape of TVC or TC. Let us suppose TVC.
(ii) Initially, TVC increases at a diminishing rate (Total Product increases at Increasing rate), which makes the gap of TVC, i.e. MC to fall.
(iii) Thereafter, TVC increases at an increasing rate( Total Product increases at diminishing rate) which makes the marginal cost to rise.
(iv) So, from inverse S-shape TVC curve, we derive U-shape MC curve.

Question. What do the long run marginal cost and average cost curves look like?
Answer: In the long-run, all costs are variable costs. There is no fixed cost.
According to modern theory of cost curves, long-run average cost curve (LAC) and long-run marginal cost curve (LMC) are L-shaped and not U-shaped as maintained by the traditional theory.
Long Run Average Cost Curve:Long Run Average Cost Curve:
According to modern theory, long-run costs are mainly of two types:

ADVERTISEMENTS:

(1) Production Cost and
(2) Managerial Cost.

On account of increase in production, production cost goes on falling continuously. On the contrary, as the scale of production is enlarged managerial costs may rise. Since fall in production-cost is more than rise in managerial-cost, long-run average cost (LAC) goes on falling with increase in output. In the long-run, each firm makes use of different sizes of plant and equipment.

Question. The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm?
Calculate the TVC, AFC, AVC, SAC and SMC schedules of the firm.
Q          TC
0           10
1           30
2           45
3           55
4           70
5           90
6          120

Answer: The total fixed cost will be the same at all the levels of output ranging from zero to six. For zero output, total cost is ? 10. At zero output, total variable cost will be zero. Hence,Rs. 10 represents total fixed cost at all levels of output.

Q (units)	TC (Rs)	TFC = TC − TVC 10 = 10 − 0 (Rs)	TVC = TC − TFC (Rs)	AFC=TFC/Q (Rs)	AVC=TVC/Q (Rs)	SAC = AFC + AVC (Rs)	SMC = TCn − TCn−1 (Rs)
0	10	10	10 − 10 = 0	-	-	-	-
1	30	10	30 − 10 = 20	10/1=10	20/1=20	20 + 10 = 30	30 − 10 = 20
2	45	10	45 − 10 = 35	10/2=5	35/2=17.5	17.5 + 5 = 22.5	45 − 30 = 15
3	55	10	55 −10 = 45	10/3=3.33	45/3=15	15 +3.33 =18.33	55 − 45 = 10
4	70	10	70 − 10 = 60	10/4=2.5	60/4=15	15 + 2.5  = 17.5	70 − 55 = 15
5	90	10	90 − 10 = 80	10/5=2	80/5=16	16 + 2  = 18	90 − 70 = 20
6	120	10	120 − 10 = 110	10/6=1.67	110/6=18.33	18.33 + 1.66  = 19.99	120 − 90 = 30

Question. The following table gives the total cost schedule of a firm. It Is also given that the average fixed cost at 4 units of output is Rs. 5.
Q       TC
1        50
2        65
3        75
4        95
5        130
6        185

Find the TVC, TFC. AVC, AFC, SAC and SMC schedules of the firm for the corresponding values of output.
Answer: 

Q (units)	TC (Rs)	TFC = Rs 20 (Rs)	TVC = TC − TFC (Rs)	AFC=TFC/Q (Rs)	AVC=TVC/Q (Rs)	SAC = AFC + AVC (Rs)	SMC = TCn − TCn−1 (Rs)
1	50	20	2	30	30	50	30
2	65	20	10	45	22.5	32	15
3	75	20	6.5	55	18.33	25	10
4	95	20	5	75	18.75	23.75	20
5	130	20	4	110	22	26	35
6	185	20	3.3	165	27.5	30.83	55

Question. A firm’s SMC schedule is shown in the following table. The total fixed cost of the firm is Rs. 100.
Q        SMC
0         -
1         500
2         300
3         200
4         300
5         500
6         800
Answer:   

Q	SMC  (Rs.)	TFC    (Rs.)	TVC     (Rs.)	TC      (Rs.)	AVC        (Rs.)	SAC            (Rs.)
0	-	100	0	100	-	-
1	500	100	500	600	500	600
2	300	100	800	900	400	450
3	200	100	1000	1100	333.33	366.67
4	300	100	1300	1400	325	350
5	500	100	1800	1900	360	380
6	800	100	2600	2700	433.33	450

 

MORE QUESTIONS SOLVED

I. Very Short Answer Type Questions 

Question. Give the meaning of cost. Or 
What is meant by cost in economics?  Or
What does ‘cost’ mean in economics?
Answer: Cost of producing a good, in economics, is the sum total of explicit cost, implicit cost and certain minimum profit (normal profit).

Question. Give two examples of fixed cost.
Answer: (i) Rent of the building.
(ii) Salary of permanent employees.

Question. Give two examples of variable costs.
Answer: (i) Raw materials.
(ii) Labour engaged on production.

Question. Why is average total cost greater than average variable cost?
Answer: Because AC is sum total of AFC and AVC.

Question. What is meant by total cost?
Answer: During production the expenditure incurred on various factors of production is known as total cost.

Question. Why are TC and TVC curves parallel to each other?
Answer: TC and TVC curves are parallel to each other because the vertical gap between them represents TFC which remains constant at all levels of output.

Question. How does the total fixed cost change when output changes?
Answer: Total fixed cost does not change with the change in output.

Question. Give the meaning of marginal cost. 
Answer: The cost incurred on additional unit of output is known as Marginal cost.

Question. How is MC related to TFC?
Answer: MC is independent (not related) of TFC and is affected by change in only TVC.

Question. How is TVC derived from MC schedule?
Answer: TVC = SMC

Question. What does the area under marginal cost curve show?
Answer: Area under marginal cost curve shows total variable cost.

Question. Can AC be less than MC when AC is rising?
Answer: Yes, AC can be less than MC, when AC is rising, as long as MC is more than AC.

Question. When AC curve slopes downwards, what will be the position of MC curve?
Answer: MC curve is below AC curve.

Question. What happens to AC when MC is equal to AC?
Answer: AC is constant and at its minimum point.

Question. Can AC and AVC curves touch each other?
Answer: No, because difference between AC and AVC is AFC and AFC can never be zero.

Question. Give two examples of explicit cost.
Answer: The two examples are: (i) Wages to worker by a firm, and (ii) rent to landlord by a firm.

Question. Give two examples of implicit cost of a firm.
Answer: The two examples are: (i) imputed cost of the seller’s self-owned shop; and (ii) imputed cost of family labour being used free by the seller.

Question. What is the behaviour of Total Variable Cost, as output increases? 
Answer: TVC first increases at a diminishing rate and then increases at an increasing rate.

Question. If it is given that the total variable cost for producing 15 units of output is Rs.3000 and for 16 units is Rs. 3,500. Find the value of Marginal Cost. 
Answer: MCn = TVCn-TVCn-1
MC16 =TVC16 – TVC15
=3500 – 3000 =500

 

II. Multiple Choice Questions

Question. Which cost increases continuously with the increase in production?
(a) Average cost,
(b) Marginal cost.
(c) Fixed cost.
(d) Variable cost.
Answer: (d)

Question. Which one of the following cost curves is never ‘U’ shaped?
(a) Average cost curve.
(b) Marginal cost curve.
(c) Average variable cost curve.
(d) Average fixed cost curve.
Answer: (d)

Question. Total cost in the short run is classified into fixed costs and variable costs.
Which one of the following is a variable cost?
(a) Cost of raw materials.
(b) Cost of equipment.
(c) Interest payment on past borrowings.
(d) Payment of rent on building.
Answer: (a)

Question. In the short run, when the output of a firm increases, its average fixed cost:
(a) increases.
(b) decreases.
(c) remains constant.
(d) first declines and then rises.
Answer: (b)

Question. Which one of the following statements is correct?
(a) When the marginal cost is rising, the average cost must also be rising.
(b) When the average cost is rising, the marginal cost must be falling.
(c) When the average cost is rising, the marginal cost is above the average cost.
(d) When the average cost is falling, the marginal cost must be rising.
Answer: (c)

Question. Which one of the following statements is an example of “explicit cost”?
(a) The wages a proprietor could have made by working as an employee of a large firm.
(b) The income that could have been earned in alternative uses by the resources owned by the firm.
(c) The payment of wages by the firm.
(d) The normal profit earned by a firm.
Answer: (c)

Question. Which one of the following statements is an example of an “implicit cost”?
(a) Interest that could have been earned on retained earnings used by the firm to finance expansion.
(b) The payment of rent by the firm for the building in which it is housed.
(c) The interest payment made by the firm for funds borrowed from a bank.
(d) The payment of wages by the firm.
Answer: (a)

Question. Marginal cost is defined as:
(a) The change in total cost due to a one unit change in output.
(b) Total cost divided by output.
(c) The change in output due to a one unit change in an input.
(d)Total product divided by the quantity of input.
Answer: (a)

Question. Which one of the following statements is true to the relationship between marginal cost function and average cost function?
(a) If MC is greater than ATC, ATC is falling.
(b) ATC curve intersects MC curve at minimum MC.
(c) MC curve intersects ATC curve at minimum ATC.
(d) If MC is less than ATC, ATC is increasing.
Answer: (c)

Question. Which one of the following statements is true to the relationship among the average cost functions?
(a) ATC = AFC – AVC.
(b) AVC = AFC + ATC.
(c) AFC = ATC + AVC.
(d) AFC = ATC – AVC.
Answer: (d)

Question. Which one of the following elements is not a determinant of the firm’s cost function?
(a) The production function.
(b) The price of labour.
(c) Taxes.
(d) The price of the firm’s output.
Answer: (d)

Question. Which one of the following statements is correct concerning the relationships among the firm’s cost functions?
(a) ATC=AFC-AVC
(b) AVC = AFC + ATC.
(c) AFC = ATC + TVC.
(d) AFC = ATC – AVC.
Answer: (c)

Question. Suppose output increases in the short run, than the Total cost will:
(a) increase due to an increase in fixed costs only.
(b) increase due to an increase invariable costs only.
(c) increase due to an increase in both fixed and variable costs.
(d) decrease if the firm is in the region of diminishing returns.
Answer: (b)

Question. A firm’s average fixed cost is Rs.20 at 6 units of output. What will it be at 4 units of output?
(a) Rs.60
(b) Rs.30
(c) Rs.40
(d) Rs.20
Answer: (b)

Question. If marginal cost equals to average total cost,
(a) average total cost is falling
(b) average total cost is rising
(c) average total cost is maximized
(d) average total cost is minimized
Answer: (d)

Question. When marginal costs are below average total costs,
(a) average fixed costs are rising
(b) average total costs are falling
(c) average total costs are rising
(d) average total costs are minimized
Answer: (b)

Question. If the average cost is falling,
(a) marginal cost is rising
(b) marginal cost is falling
(c) marginal cost is equal to average cost
(d) it is impossible to tell if marginal cost is rising or falling
Answer: (d)

Question. The difference between average total cost and average variable cost:
(a) is constant
(b) is total fixed cost
(c) gets narrow as output decreases
(d) is the average fixed cost
Answer: (d)

Question. If the total cost curve is parallel to X-axis, marginal cost will:
(a) increase
(b) decrease
(c) zero
(d) None of these.
Answer: (c)

Question. The total cost at 5 units of output is Rs. 30. The fixed cost is Rs. 5. The average variable cost at 5 units of output is: [CBSE Sample Paper 2014]
(a) Rs.25
(b) Rs.6
(c) Rs.5
(d) Rs.1
Answer: (c)

 

III. Short Answer Type Questions 

Question. Define total fixed cost (Supplement/ Indirect/overhead cost).
Or
Define fixed cost. Or
What is meant by fixed (supplementary) costs of a firm? Give examples.
Answer: (i) Fixed costs are those costs of production which do not change with a change in output.
(ii) These are the costs incurred on fixed factors, like rent of land and building, interest, etc.
These are unavoidable contractual costs.
(iii) Fixed costs are also called overhead costs or general costs because these are common for all the units produced. These costs are also called supplementary costs or indirect costs.
(iv) The shape of Total fixed Cost is horizontal (Parallel to X-Axis). They have to be incurred when the output is large or small or even zero.

Question. What is meant by variable (prime) cost of a firm? Give examples. 
Answer: (i) The cost incurred on variable factors of production is known as TVC.
(ii) TVC is very much related with the production and fluctuates with the fluctuation in production.
(iii) In case of zero level of production, TVC would also be zero.
(iv) For example, Wages of casual labour, payment for raw material, etc.

Question. Explain the behaviour of average fixed cost using numerical example. 
Answer: (i) The per unit cost incurred on fixed factors of production is known as average fixed cost. 
Unit of commodity    TFC    AFC
0                                60          - 
1                                60         60
2                                60         30
3                                60         20
4                                60         15
5                                60         12
AFC falls as output increases because
AFC=TFC/Output
and TFC remains constant. So, as output increases, TFC remains constant,AFC falls

Question. Distinguish between variable cost and fixed cost. Give two examples of each.
Answer: 

BASIS FOR COMPARISON	FIXED COST	VARIABLE COST
Meaning	The cost which remains same, regardless of the volume produced, is known as fixed cost.	The cost which changes with the change in output is considered as a variable cost.
Nature	Time Related	Volume Related
Incurred when	Fixed costs are definite, they are incurred whether the units are produced or not.	Variable costs are incurred only when the units are produced.
Unit Cost	Fixed cost changes in unit, i.e. as the units produced increases, fixed cost per unit decreases and vice versa, so the fixed cost per unit is inversely proportional to the number of output produced.	Variable cost remains same, per unit.
Behavior	It remains constant for a given period of time.	It changes with the change in the output level.
Combination of	Fixed Production Overhead, Fixed Administration Overhead and Fixed Selling and Distribution Overhead.	Direct Material, Direct Labor, Direct Expenses, Variable Production Overhead, Variable Selling and Distribution Overhead.
Examples	Depreciation, Rent, Salary, Insurance, Tax etc.	Material Consumed, Wages, Commission on Sales, Packing Expenses, etc.

 

Question. Why is AC curve U-shaped in short run? Or
Why is AC curve U-shaped?
Answer: Average Cost is U-Shaped because of Law of variable proportion:
(i) The shape of average cost (AC) depends upon total cost (TC).
(ii) Initially, total cost (TC) increases at a diminishing rate (Total Product increases at Increasing rate), which makes its average, i.e., average cost (AC) to fall, then reaches its minimum point.

(iii) Thereafter, total cost (TC) increases at increasing rate (Total Product increases at diminishing rate), which makes the average cost (AC) to rise. This type of production behaviour shows operation of law of variable proportion.

Question. An individual is both the owner and the manager of a shop taken on rent.
Identify implicit cost and explicit cost from this information. Explain. 
Answer: (i) For producing a commodity, a firm requires factor inputs (like services of land,labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.).
(ii) Actual money spent by a firm on buying and hiring of factor and non¬factor inputs is called explicit cost. As per question, rent paid for the shop is an explicit cost.
(iii) Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself. As, per question, imputed salary of the owner working as manager, imputed interest on self-supplied capital, etc. are implicit costs.cost and implicit cost.

Question. State the distinction between explicit each. Give an example of each?
Answer: 

BASIS FOR COMPARISON	EXPLICIT COST	IMPLICIT COST
Meaning	The costs which involve outflow of cash due to the use of factors of production is known as Explicit Cost.	The costs in which there is no cash outlay, is known as Implicit Cost.
Alternatively known as	Out-of-pocket Costs	Imputed Costs
Occurrence	Actual	Implied
Recording and Reporting	Yes	No
Estimation of Cost	Objective	Subjective
Which profit can be calculated with the help of cost?	Accounting Profit and Economic Profit	Economic Profit
Example	Salaries, rent, advertisement, wages, etc.	Interest on owner's capital, Salary to owner, rent of owner's building, etc. which do not occur in reality.

 

Question. A producer starts a business by investing his own savings and hiring the labour. Identify implicit and explicit costs from this information. Explain. 
Answer: (i) For producing a commodity, a firm requires factor inputs (like services of land,labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel efc.).
(ii) Actual money spent by a firm on buying and hiring of factor and nonfactor inputs is called explicit cost. As per question, a producer is hiring the labour, than the wages and salary paid to labour is a explicit cost.
(iii) Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself. As, per question, if a producers start a business by investing his own savings, than the imputed interest on self-supplied capital he earned is a implicit cost.

Question. A farmer takes a farm on rent and carries on farming with the help of his family members. Identify explicit and implicit costs from this information. Explain. 
Answer: (i) For producing a commodity, a firm requires factor inputs (like services of land, labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.).
(ii) Actual money spent by a firm on buying and hiring of factor and nonfactor inputs is called explicit cost. As per question, a farmer takes a farm on rent. So, the rent he pays to
landloard is the explicit cost.
(iii) Implicit cost is the imputed or estimated value of inputs supplied , by the owner of the firm himself. As per question, if a farmer carries on farming with the help of family members, even then the imputed wages will be an implicit cost.

Question. Explain the relationship between AC and MC with the help of a diagram.

Answer: (i) As long as MC is below AC, AC curve falls till their intersection at point E.
(ii) When MC curve comes to fall, it falls more rapidly than AC curve and reaches its minimum point B earlier than the AC curve reaches its minimum point E.
Therefore, MC curve is rising from B to E whereas AC curve is still falling from A to E.
(iii) When MC curve is rising, it cuts the AC curve at its minimum point E and after that point MC is above than AC.

Question. Define cost. State the relation between marginal cost and average variable cost. 
Answer: Cost is the sum total of explicit cost, implicit cost and certain minimum profit (normal profit).
(i) As long as MC is below AVC, AVC curve falls till their intersection at point E.
(ii) When MC curve comes to fall, it falls more rapidly than AVC curve and reaches its minimum point B earlier than the AVC curve reaches its minimum point E.
Therefore, MC curve is rising from B to E whereas AVC curve is still falling from A to E.
(iii) When MC curve is rising, it cuts the AVC curve at its minimum point E and after that point MC is above than AVC.

Question. What is the behaviour of (a) Average Fixed Cost and (b) Average Variable Cost as more and more units of a good are produced? 
Answer: (a) The average fixed cost falls as more and more units of goods are produced. It is so because average fixed cost is equal to. Total Fixed Cost (TFC)
Output and total fixed cost remains constant with increase in level of output. So, with constant total fixed cost and increasing output, the average fixed cost falls.
(b) Average Variable Cost (AVC) is U-shaped with increase in output because of Law of Variable Proportion.
(i) As we know the shape of AVC depends upon the shape of Total Variable Cost (TVC).
Initially, TVC increases at diminishing rate (because Total Product Increases at increasing Rate), that makes the AVC to fall.
(ii) Thereafter, TVC increases at increasing rate (because Total Product Increases at diminishing Rate), that makes the average variable cost to rise.
(iii) So, from inverse S-shape, TVC curve, we derive the U shape AVC curve.

Question. Can MC increase when AC falls?
Answer: Yes, it can happen when MC is below, than AC at the time of MC increases. The reason is that MC is confined to only one unit of the commodity produced whereas AC is
related to all the units of commodity produced. As a result when MC increase, in case of MC,the whole increase is confined to the concerned one unit but in case of AC, this increase is shared by all the units of commodity produced. As the result of, rising MC is unable to bring about an increase in AC.

Question. Find out the total fixed cost in the following:

Total Output (Units)	Total Cosr (₹)
0	120
1	180
2	200
3	210
4	230
5	270
6	360

Answer: The total fixed cost will be the same at all the levels of output, ranging from zero to six. For zero output, total cost is Rs 120. At zero output, total variable cost will be zero. Hence, Rs 120 represents total fixed cost at all levels of output.