RBSE Solutions Class 12 Economics Chapter 8 Concept of Cost

RBSE Class 12 Economics Chapter 8 Practice Questions

RBSE Class 12 Economics Chapter 8 Multiple Choice Questions

 

Question 1. Which costs are to be borne by society indirectly?
(a) Monetary Cost
(b) Average Cost
(c) Variable Cost
(d) Real costs
Answer: (d) Real costs
In simple words: Real costs are expenses that society faces indirectly, like pollution or inconvenience caused by production, even if money isn't directly exchanged. They represent the actual burden on society.

🎯 Exam Tip: Real costs are often hard to measure in money but represent true societal sacrifices. Focus on indirect impacts for these questions.

 

Question 3. Those costs which are not included into accounts are known as:
(a) Monetary Costs
(b) Real Costs
(c) Explicit Costs
(d) Implicit Costs
Answer: (d) Implicit Costs
In simple words: Implicit costs are the hidden costs of using your own resources, like the money you could have earned if you used your time or land differently. These don't show up in a company's financial records.

🎯 Exam Tip: Remember that implicit costs are 'opportunity costs' - the value of the next best alternative given up. They are non-cash expenses.

 

Question 4. Which curve is also called Envelope Curve?
(a) SMC
(b) LAC
(c) SAC
(d) LMC
Answer: (b) LAC
In simple words: The Long-run Average Cost (LAC) curve is often called the Envelope Curve because it "envelopes" or touches the lowest points of many short-run average cost (SAC) curves. It shows the lowest possible cost to produce any output in the long run.

🎯 Exam Tip: The LAC curve's 'envelope' shape is due to a firm's ability to choose the most efficient plant size for any given output in the long run.

 

Question 5. If total cost is Rs 200 and quantity of output is 20 units, then AC will be:
(a) 10
(b) 30
(c) 20
(d) 40
Answer: (a) 10
In simple words: To find the Average Cost (AC), you divide the total cost by the number of units produced. So, Rs 200 divided by 20 units gives Rs 10 per unit.

🎯 Exam Tip: Average Cost (AC) is a per-unit measure. Always divide Total Cost (TC) by Quantity (Q) to find it: \( AC = \frac{TC}{Q} \).

RBSE Class 12 Economics Chapter 8 Very Short Answer Type Questions

 

Question 1. With which factors are variable costs related in the economy?
Answer: Variable costs are related to factors like raw materials, wages for casual and temporary labor, and transport costs. These costs change with the level of production.
In simple words: Variable costs are linked to things that change when more or less is made, like buying more raw stuff or hiring extra workers for a short time.

🎯 Exam Tip: Variable costs are directly tied to output levels; if production stops, variable costs become zero.

 

Question 3. What is cost?
Answer: In economics, cost refers to the expenses a company incurs on inputs to produce goods or services. These expenses are necessary to get the desired output.
In simple words: Cost is simply the money a business spends on things needed to make its products.

🎯 Exam Tip: A good definition of cost in economics includes both the money spent and the resources used to create output.

 

Question 4. Write down the formula of Marginal Cost.
Answer: The formula for Marginal Cost (MC) is:
\( MC = TC_n - TC_{n-1} \)
Where \( TC_n \) is the total cost of producing 'n' units, and \( TC_{n-1} \) is the total cost of producing 'n-1' units.
Alternatively, it can be written as:
\( MC = \frac{\Delta TC}{\Delta Q} \)
Here, MC represents Marginal Cost, \( \Delta TC \) is the change in Total Cost, and \( \Delta Q \) is the change in Output. Marginal cost tells us the extra cost of making one more unit.
In simple words: Marginal Cost is how much extra money it costs to make one more item. You find it by subtracting the total cost of making a little less from the total cost of making a little more.

🎯 Exam Tip: Always remember that marginal cost focuses on the *change* in cost from producing *one additional unit* of output, not the average cost of all units.

 

Question 5. Shape of which curve is a hyperbola?
Answer: The Average Fixed Cost (AFC) curve has the shape of a hyperbola. This is because as the scale of production increases, the average fixed cost continuously decreases. Spreading fixed costs over more units makes each unit's share smaller.
In simple words: The curve that looks like a hyperbola is the Average Fixed Cost (AFC) curve. It gets smaller and smaller as you make more products.

🎯 Exam Tip: The AFC curve slopes downward because fixed costs are spread over a larger output, but it never touches zero, creating a hyperbolic shape.

Short Answer Type Questions

 

Question 1. Give two examples of Variable Cost and Fixed Cost.
Answer: Examples of fixed costs include:
1. Rent of building
2. Depreciation of Machinery.
In simple words: Fixed costs are things like paying rent for a building or the cost of a machine getting old; these costs stay the same even if you make more or fewer products.

🎯 Exam Tip: Fixed costs do not vary with the level of production in the short run, unlike variable costs that change with output.

 

Question 4. What is opportunity cost?
Answer: Opportunity cost is the value of the next best alternative that was not chosen when a decision was made. It represents the income or benefit lost by choosing one option over another. This concept is vital because resources are limited and have multiple uses.
In simple words: Opportunity cost is what you give up when you choose one thing instead of the next best thing. It's the "cost" of missing out on another chance.

🎯 Exam Tip: For opportunity cost questions, always identify the *next best* alternative that was sacrificed, not just any alternative.

 

Question 5. Explain LAC (Long run average cost curve).
Answer: The Long-run Average Cost (LAC) curve shows the lowest possible average cost a firm can achieve for producing different levels of output when all factors of production are variable. It is found by dividing the long-run total cost by the quantity of output. The LAC curve is usually U-shaped because of economies and diseconomies of scale. This curve helps firms decide the most efficient plant size for long-term production.
\( LAC = \frac{TC}{Q} \)
In simple words: The LAC curve tells a company the cheapest way to make something over a long time, assuming it can change everything, like factory size. It's shaped like a 'U' because at first, making more saves money, but then it can get more expensive.

🎯 Exam Tip: The LAC curve is an 'envelope' curve because it represents the minimum points of various short-run average cost curves, showing the optimal plant size for each output level.

RBSE Class 12 Economics Chapter 8 Long Answer Type Questions

 

Question 1. Classify and explain various types of costs in economics.
Answer: Costs in economics can be divided into different categories based on their nature and how they are recorded. Here are some of the main types:

(a) Social Cost- Social cost is the total burden society bears due to the production of a good. It includes both the private costs paid by the producer and the external costs imposed on society. For instance, pollution from a factory is a social cost.

(b) Monetary Cost- This is the direct money spent to produce a good or service. For example, if producing 500 T-shirts costs Rs 2,00,000, then this is the monetary cost of those T-shirts.

(c) Opportunity Cost- This is the value of the next best alternative that must be given up when making a choice. It is also known as economic cost and arises because resources are scarce and have alternative uses. For example, a farmer planting wheat cannot also plant corn on the same land, so the lost corn profit is an opportunity cost.

(d) Real Cost- Real cost refers to the non-monetary sacrifices involved in production, such as the effort, pain, and discomfort of labor, or the waiting and abstinence required for saving capital. According to Marshall, these sacrifices represent the true real costs of production.

(e) Short-term Cost- These costs happen over a period where some production factors are fixed, while others are variable. Short-period costs are further divided into:
(a) Fixed Cost – These are the total expenses a producer incurs on fixed factors of production, like rent for a building or machinery. Fixed costs do not change with output.
(b) Variable Cost – These are the expenses incurred on variable factors, such as raw materials and casual labor. Variable costs change with the level of output.

(g) LAC (Long-term Average Cost or Envelope Curve) – Long-term average cost is the minimum possible cost per unit to produce different quantities of output over a long period. It shows the most efficient cost for each output level when all inputs can be adjusted.

(i) LMC (Long-term Marginal Cost) - Long-term marginal cost is the change in total cost in the long run resulting from producing one more or one less unit of a product. It happens when all production inputs are fully adjusted.

(h) Explicit Cost – These are actual business expenses that are recorded in accounting books. They are direct cash payments for purchased or hired factors of production, like wages, interest, or rent.

(ii) Implicit Cost- Implicit costs are the value of the resources owned and used by the entrepreneur in their own business. This includes things like the normal profit, the imputed rent for using their own land, or the salary the owner could have earned working elsewhere.
In simple words: Costs are different kinds of money or effort spent to make things. Some are direct payments (explicit), some are what you miss out on (opportunity), and some are the effort workers put in (real). Some costs stay fixed, while others change as you make more.

🎯 Exam Tip: When explaining types of costs, provide a clear definition and a simple example for each. Distinguishing between explicit (recorded) and implicit (opportunity) costs is often key.

 

Question 2. Find out the concepts of costs with formula for the following table:

Answer:
To calculate the cost concepts, we use the following formulas:
\( TC = TFC + TVC \)
\( AFC = \frac{TFC}{Q} \)
\( AVC = \frac{TVC}{Q} \)
\( SAC = AFC + AVC \) or \( SAC = \frac{TC}{Q} \)
\( SMC = TC_n - TC_{n-1} \) or \( SMC = \frac{\Delta TC}{\Delta Q} \)

Here is the completed table with all the calculated cost concepts:

In simple words: This table shows how different costs change as more items are produced. We calculate total cost by adding fixed and variable costs. Then we find average costs by dividing by the quantity, and marginal cost by finding the extra cost for each new item.

🎯 Exam Tip: When filling out cost tables, always start by calculating Total Cost (TC), then Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and finally Marginal Cost (MC) in that order for accuracy.

RBSE Class 12 Economics Chapter 8 Multiple-Choice Questions

 

Question 1. Which of the following is considered as production in economics?
(a) Tilling of soil
(b) Singing a song before friends
(c) Preventing a child from falling into a manhole on the road
(d) Painting a picture for pleasure
Answer: (a) Tilling of soil
In simple words: In economics, production means making something useful. Tilling soil creates crops, which are useful, while the other options are either personal hobbies or services that don't produce goods in the economic sense.

🎯 Exam Tip: Production in economics involves creating goods or services that satisfy wants and needs, typically for exchange in a market.

 

Question 2. To economists, the main difference between the short-term and the long-term is that:
(a) In the short-term, all inputs are fixed, while in the long-term, all inputs are variable.
(b) In the short-term, the firm varies all of its inputs to find the least cost combination of inputs.
(c) In the short-term, at least one of the firm's input levels is fixed.
(d) In the long-term, the firm makes a constrained decision about how to use existing plant and equipment efficiently.
Answer: (c) In the short-term, at least one of the firm's input levels is fixed.
In simple words: The main difference is that in the short run, a business cannot change all its resources, like its factory size. But in the long run, it can change everything.

🎯 Exam Tip: The distinction between short run and long run is about the flexibility of inputs, not the length of time. Fixed inputs define the short run.

 

Question 3. Which cost increases continuously with the increase in production?
(a) Average Cost
(b) Fixed Cost
(c) Variable Cost
(d) Marginal Cost
Answer: (c) Variable Cost
In simple words: Variable costs keep going up as you make more products. If you make less, they go down.

🎯 Exam Tip: Variable costs are directly proportional to the quantity of output produced, unlike fixed costs which remain constant.

 

Question 4. Which 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) Average Fixed Cost Curve
In simple words: The Average Fixed Cost (AFC) curve is never 'U' shaped. It always goes downwards because fixed costs are spread over more and more units, but it never goes back up.

🎯 Exam Tip: Remember that AFC continuously decreases as output increases, but it never becomes zero, giving it a hyperbolic shape, not a 'U' shape.

 

Question 5. 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) Decreases
In simple words: When a company makes more products, its Average Fixed Cost (AFC) goes down. This is because the same total fixed costs are divided by a larger number of items.

🎯 Exam Tip: AFC will always decrease as output rises because fixed costs are constant and spread over more units. This is a key characteristic of short-run costs.

 

Question 6. Which one of the following is also known as planning curve?
(a) Long-term average cost curve
(b) Short-term average cost curve
(c) Average variable cost curve
(d) Average total cost curve
Answer: (a) Long-term average cost curve
In simple words: The Long-term Average Cost (LAC) curve is called the planning curve. It helps businesses decide what size of factory or plant to build for different production levels to be most efficient in the long run.

🎯 Exam Tip: The LAC curve is crucial for long-term strategic decisions, guiding firms in choosing the optimal scale of operation.

 

Question 7. The cost of one thing in terms of the alternative given up is known as:
(a) Production cost
(b) Physical cost
(c) Real cost
(d) Opportunity cost
Answer: (d) Opportunity cost
In simple words: When you choose one option, the value of the next best option you did not choose is called the opportunity cost. It's the cost of what you missed out on.

🎯 Exam Tip: Opportunity cost is a fundamental concept in economics, emphasizing that every choice involves a trade-off.

 

Question 9. Which of the following statements is correct :
(a) When the Average Cost is rising, the Marginal 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) When the Average Cost is rising, the Marginal Cost is above the average cost.
In simple words: When the average cost is going up, it means the cost of making one more unit (marginal cost) is higher than the average cost so far, pulling the average up.

🎯 Exam Tip: Remember the rule: if marginal cost is greater than average cost, average cost rises. If marginal cost is less than average cost, average cost falls. If they are equal, average cost is at its minimum.

 

Question 10. Which of the following is an example of an "Explicit cost" :
(a) The wages a properitor could have earned 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) The payment of wages by the firm.
In simple words: Explicit costs are direct payments made by a company to outsiders. Paying wages to workers is a clear example of such a direct, recorded payment.

🎯 Exam Tip: Explicit costs are actual cash payments that are visible and recorded in accounting statements. Think of them as 'out-of-pocket' expenses.

 

Question 11. Which of the following 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) Interest that could have been earned on retained earnings used by the firm to finance expansion.
In simple words: An implicit cost is a hidden cost, like the money a business could have earned if it invested its own profits elsewhere instead of using them for its own growth.

🎯 Exam Tip: Implicit costs are the opportunity costs of using a firm's *own* resources, rather than purchasing them from others. They don't involve a cash outflow.

 

Question 13. A firm producing 7 units of output has an Average Total Cost of Rs 150 and has to pay Rs 350 to its fixed factors of production whether it produces or not. How much of the Average Total Cost is made up of Variable Costs?
(a) Rs 200
(b) Rs 50
(c) Rs 300
(d) Rs 100
Answer: (d) Rs 100
In simple words: First, calculate the total cost by multiplying average total cost by units (Rs 150 * 7 = Rs 1050). Then, subtract the total fixed cost (Rs 350) to find the total variable cost (Rs 700). Finally, divide the total variable cost by the units (Rs 700 / 7) to get the average variable cost, which is Rs 100.

🎯 Exam Tip: Break down cost calculation questions step-by-step: Total Cost = ATC * Q, TVC = TC - TFC, and AVC = TVC / Q. Convert `₹` to `Rs` and ensure consistent use.

 

Question 14. Identify the Fixed Cost from the following:
(a) Labour Cost
(b) Electricity bill
(c) Salary of watchman
(d) Cost of raw materials
Answer: (c) Salary of watchman
In simple words: A fixed cost is something a company pays no matter how much it produces. A watchman's salary usually stays the same each month, regardless of output, making it a fixed cost.

🎯 Exam Tip: Fixed costs do not change with the level of output. Labour costs and raw material costs are typically variable, while a watchman's salary is a fixed expense for the premises.

 

Question 15. Which of the following is a Variable Cost in the short term?
(a) Rent of the factory
(b) Wages paid to the factory labour
(c) Interest payments on borrowed financial capital
(d) Payment on the lease for factory equipment
Answer: (b) Wages paid to the factory labour
In simple words: Variable costs change with how much is produced. If a factory hires more workers to make more goods, the wages paid to those workers will go up, making it a variable cost.

🎯 Exam Tip: Variable costs are expenses that directly increase or decrease with the volume of production. Wages for casual or production-line labor are a classic example.

 

Question 17. If Marginal Cost equals Average Total Cost :
(a) Average total cost is falling
(b) Average total cost is rising
(c) Average total cost in maximized
(d) Average total cost is minimized
Answer: (d) Average total cost is minimized
In simple words: When the extra cost to make one more item (Marginal Cost) is exactly equal to the average cost of all items, it means the average cost has reached its lowest point.

🎯 Exam Tip: This is a critical point in cost theory: the marginal cost curve always intersects the average total cost curve at the ATC curve's minimum point.

 

Question 18. The change in the total production resulting from a change in a variable input is:
(a) Average cost
(b) Average production
(c) Marginal cost
(d) Marginal production
Answer: (d) Marginal production
In simple words: Marginal production is how much more output you get by adding one more unit of a changing input, like one more worker. It measures the extra output from that extra input.

🎯 Exam Tip: Marginal production (or marginal product) focuses on the *additional* output from an *additional* unit of input, helping firms analyze efficiency changes.

 

Question 19. 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) Average total costs are falling
In simple words: If the cost of making one more item (Marginal Cost) is lower than the average cost of all items, then the average cost will start to drop. It's like a low score pulling down your average test score.

🎯 Exam Tip: Think of it like grades: if your next test score (marginal) is lower than your average, your average will fall. Similarly, if MC < ATC, then ATC falls.

 

Question 21. The difference between Average Total Cost and Average Variable Cost:
(a) is constant
(b) is total fixed cost
(c) gets narrower as output decreases
(d) is the average fixed costs
Answer: (d) is the average fixed costs
In simple words: Average Total Cost (ATC) minus Average Variable Cost (AVC) always equals Average Fixed Cost (AFC). This is because ATC includes AFC and AVC, so when you remove AVC, AFC remains.

🎯 Exam Tip: Remember the basic cost identity: ATC = AFC + AVC. Therefore, ATC - AVC = AFC, and ATC - AFC = AVC.

 

Question 22. The average profit is equal to the difference between :
(a) AC and TC
(b) AC and VC
(c) AC and AR
(d) AC and TR
Answer: (c) AC and AR
In simple words: Average profit is found by taking the average money a company earns per unit (Average Revenue) and subtracting the average money it costs to make each unit (Average Cost).

🎯 Exam Tip: Profit per unit is (Price - Average Cost). Since Average Revenue (AR) is essentially the price per unit, (AR - AC) gives average profit.

 

Question 23. Hyperbola is the shape of this curve :
(a) TFC
(b) AFC
(c) FC
(d) MC
Answer: (b) AFC
In simple words: The curve for Average Fixed Cost (AFC) looks like a hyperbola. This is because fixed costs are constant, and as production increases, the fixed cost per unit keeps getting smaller.

🎯 Exam Tip: The AFC curve is always downward sloping and never touches the x-axis, accurately representing a hyperbola where price times quantity is constant.

RBSE Class 12 Economics Chapter 8 Very Short Answer Type Questions

 

Question 1. What do you mean by accounting costs?
Answer: Accounting costs are the direct expenses a firm's owner (entrepreneur) incurs and pays for in cash. These are the costs that are recorded in the company's financial books.
In simple words: Accounting costs are the actual money a business spends and writes down, like paying for materials or workers.

🎯 Exam Tip: Accounting costs are explicit costs, meaning they involve a tangible money payment and are easily quantifiable.

 

Question 2. What do you understand by selling costs?
Answer: Selling cost refers to the money spent by a firm specifically to promote and increase the sale of its products. This includes expenses like advertising, sales commissions, and marketing efforts.
In simple words: Selling costs are the money a company spends to make people want to buy its products, like for ads or special offers.

🎯 Exam Tip: Selling costs are distinct from production costs; they are focused on demand creation and market expansion rather than the manufacturing process itself.

 

Question 3. What is Production Cost?
Answer: Production cost refers to the total amount of money and resources spent to make a product or provide a service. It includes all the expenses incurred on various inputs like raw materials, labor, and capital during the manufacturing process.
In simple words: Production cost is all the money spent to create a product, like buying materials and paying workers.

🎯 Exam Tip: Production cost is fundamental to determining a product's price and a firm's profitability, encompassing both fixed and variable costs.

 

Question 4. What is monetary Cost?
Answer: Monetary cost is the amount of money actually spent to produce a commodity. It represents the explicit cash outlays made by a firm for its factors of production and other expenses.
In simple words: Monetary cost is the actual money you pay out to make something.

🎯 Exam Tip: Monetary costs are tangible and easily recorded in financial statements, forming the basis of accounting calculations.

 

Question 5. What is Fixed Cost?
Answer: Fixed cost refers to the expenditure incurred on the fixed factors of production. These costs do not change with the level of output in the short run. Even if production is zero, fixed costs must still be paid.
In simple words: Fixed costs are payments that stay the same no matter how much a company makes, like rent for the factory building.

🎯 Exam Tip: Fixed costs are constant in the short run and are independent of the volume of production. Examples include rent, insurance, and salaries of permanent staff.

 

Question 7. What is Average Cost?
Answer: Average cost means the total cost of making one unit of something. It is found by dividing the total money spent on production by the total number of items made. This helps businesses understand how much each item costs them.
In simple words: Average cost is the total cost divided by the number of units produced. It shows the cost for each item.

🎯 Exam Tip: Average cost is a key metric for businesses to evaluate efficiency and set prices for their products.

 

Question 8. State the formula to determine average cost.
Answer: The formula to find the average cost (AC) is to divide the total cost (TC) by the total quantity of output (Q). This calculation helps in finding the cost per unit.
\( \text{Average Cost (AC)} = \frac { \text{Total Cost (TC)} }{ \text{Output (Q)} } \)
In simple words: The formula for average cost is Total Cost divided by Output.

🎯 Exam Tip: Always remember the basic formula for average cost, as it forms the basis for many other cost calculations.

 

Question 9. Define the shape of AC and MC curves.
Answer: Both the Average Cost (AC) and Marginal Cost (MC) curves usually have a 'U' shape. This shape shows how costs first decrease as production increases, then reach a minimum, and finally start to rise again.
In simple words: Both the average cost and marginal cost curves look like the letter 'U'.

🎯 Exam Tip: The U-shape signifies that there's an optimal level of production where costs per unit are minimized, reflecting the law of variable proportions.

 

Question 10. If the total cost of producing 10 units of a commodity is Rs 40 and that of producing 8 units is Rs 30, what will be the marginal cost?
Answer: Marginal cost is the extra cost to make one more unit. To find the marginal cost, we calculate the change in total cost divided by the change in quantity.
\( \text{MC} = \frac { \Delta \text{TC} }{ \Delta \text{Q} } \)
\( \implies \text{MC} = \frac { 40 - 30 }{ 10 - 8 } \)
\( \implies \text{MC} = \frac { 10 }{ 2 } \)
\( \implies \text{MC} = \text{Rs } 5 \)
In simple words: The marginal cost is Rs 5. This is because the cost increased by Rs 10 (40-30) when production increased by 2 units (10-8).

🎯 Exam Tip: For numerical problems involving marginal cost, ensure you calculate the difference in total cost and the difference in quantity accurately before dividing.

 

Question 11. What do you understand by Explicit Cost?
Answer: Explicit costs are the direct payments a company makes for resources and services from outside suppliers to produce its goods. These are actual money outlays, like paying for rent or wages. These costs are clearly recorded in financial books.
In simple words: Explicit costs are the money a company pays to others for things it needs to make its products, like rent or salaries.

🎯 Exam Tip: Remember that explicit costs are observable, tangible cash outflows, making them easy to track in accounting records.

 

Question. Why is the total fixed cost curve parallel to the X-axis?
Answer: The total fixed cost (TFC) curve is parallel to the X-axis because fixed costs do not change, regardless of the level of output produced. Even if a business produces zero units, it still has to pay fixed costs like rent or insurance. This means the cost remains constant, forming a horizontal line on a graph. This constant nature distinguishes it from variable costs which change with output.
In simple words: The total fixed cost curve is flat because fixed costs stay the same no matter how much you produce.

🎯 Exam Tip: Understanding why TFC is a horizontal line is fundamental to grasping the concept of fixed costs in economics.

 

Question 14. Why are Total Cost curve and Variable Cost curve parallel to each other?
Answer: The Total Cost (TC) curve and the Variable Cost (VC) curve are parallel because the difference between them is always the fixed cost. Since fixed costs do not change with output, the vertical distance between the TC and VC curves remains constant, making them run parallel. This relationship is important for cost analysis.
In simple words: The total cost and variable cost curves are parallel because the gap between them is always the fixed cost, which stays the same.

🎯 Exam Tip: Visualizing TC as VC shifted upwards by the amount of TFC helps understand their parallel relationship.

 

Question 15. In which cost the expenditure on raw material and wages of casual labourers will be included?
Answer: The expenditure on raw materials and wages for casual laborers is included in **Monetary Cost**. These are direct money payments made for production.
In simple words: These expenses are part of monetary cost.

🎯 Exam Tip: Monetary costs are actual cash payments and are also known as explicit costs in most contexts.

 

Question 16. Why does fixed cost not influence marginal cost?
Answer: Fixed costs do not affect marginal cost because marginal cost is the change in total cost from producing one more unit. Since fixed costs do not change as production increases or decreases, they don't contribute to the "extra" cost of one more unit. Fixed costs are paid regardless of output, so they are not part of the cost of producing an additional unit.
In simple words: Fixed costs stay the same no matter how much you produce, so they don't change the cost of making just one extra item.

🎯 Exam Tip: Always remember that marginal cost is only influenced by variable costs, as fixed costs remain constant in the short run.

 

Question 17. The cost of zero level of output is equal to which cost?
Answer: The cost at a zero level of output is equal to the **Fixed Cost**. When no goods are produced, variable costs are zero, but fixed costs (like rent) still have to be paid. This is a key distinction between fixed and variable costs.
In simple words: When nothing is produced, the cost that remains is the fixed cost.

🎯 Exam Tip: This point is crucial for distinguishing fixed costs from variable costs; variable costs are zero when output is zero, but fixed costs are not.

 

Question 18. What is Opportunity Cost?
Answer: Opportunity cost is what you give up when you choose one option over another. It's the value of the next best thing you could have done or chosen. This concept is fundamental in economics because resources are limited.
In simple words: Opportunity cost is the value of the best option you don't choose when you make a decision.

🎯 Exam Tip: Always identify the "next best" alternative to correctly determine the opportunity cost; it's not just any alternative, but the most valuable one forgone.

 

Question. What is Break Even Point?
Answer: The break-even point is the level of production where a company's total costs are equal to its total revenue. At this point, the business is neither making a profit nor incurring a loss. It is an important milestone for any new business.
In simple words: The break-even point is where a company's earnings exactly cover its costs, so it makes no profit or loss.

🎯 Exam Tip: The break-even point is a critical indicator for business sustainability, showing the minimum output needed to cover all expenses.

 

Question 21. What do you understand by Shut Down Point?
Answer: The shut-down point is when a business's price for its goods falls below its average variable cost. At this point, the company cannot even cover the direct costs of production, so it is better to stop operating to prevent further losses. This is a critical decision point for firms.
In simple words: It's the point where a business should stop making things because the money it gets doesn't even cover the immediate costs of making them.

🎯 Exam Tip: Distinguish the shut-down point from the break-even point; the former focuses on covering variable costs, while the latter aims to cover total costs.

 

Question 22. Define Explicit Cost according to "Leftwitch”.
Answer: According to Leftwitch, "Explicit costs are those cash payments which firms make to outsiders for their services and goods." These are payments made directly to others, such as for wages or raw materials.
In simple words: Leftwitch says explicit costs are the money a company pays to people outside the company for their help or for things it buys.

🎯 Exam Tip: When citing definitions, ensure you quote the author's words precisely and clearly indicate the source.

 

Question 23. Define Implicit Cost according to “Leftwitch”.
Answer: According to Leftwitch, "Implicit costs are costs of self-owned and self-employed resources." These are the costs associated with using resources that a business already owns, like the owner's time or capital, rather than paying someone else for them.
In simple words: Leftwitch states that implicit costs are the costs of using a business's own resources, like the owner working there or using their own building.

🎯 Exam Tip: Implicit costs are often overlooked but are crucial for understanding the true economic profit of a business, as they represent forgone opportunities.

 

Question 24. Define Opportunity Cost according to the “Richard Lipsey”.
Answer: Richard Lipsey defines opportunity cost as: "The cost of using something in a particular venture is the benefit forgone by not using it in its best alternative use." This means it's the value of the best alternative option you miss out on.
In simple words: Richard Lipsey says opportunity cost is the value of the best thing you could have done instead of what you chose.

🎯 Exam Tip: Clearly state the forgone benefit as the opportunity cost, emphasizing that it's the *best* alternative given up.

 

Question 25. Write down the definition of Real Cost given by "Marshall”?
Answer: Marshall defined real cost as: "The exertion of all different kinds of labour that are directly or indirectly involved in making it, together with the abstinences or rather the waiting required, for saving the capital used in making it; all these sacrifices together will be called the real costs of production of the commodity." This definition emphasizes the non-monetary aspects of cost, such as effort and sacrifice.
In simple words: Marshall described real costs as all the effort workers put in and the sacrifices made to save money for capital, which are needed to make a product.

🎯 Exam Tip: Real costs highlight the non-monetary human element in production, such as effort and sacrifice, which are distinct from monetary costs.

 

Question 27. Write down the definition of marginal cost given by "Ferguson"?
Answer: Ferguson defined marginal cost as: "The addition to total cost due to the addition of one unit of output." It means the extra cost incurred when one more unit of a product is made.
In simple words: Ferguson says marginal cost is how much more the total cost goes up when you make just one more item.

🎯 Exam Tip: Always specify that marginal cost is the *additional* cost for *one more* unit of output.

 

Question 28. Write down the definition of Marginal Cost given by “Samuelson"?
Answer: Samuelson defined marginal cost as: "Marginal cost at any level of output is the extra cost for producing one extra unit more or less." This highlights that marginal cost applies to both increasing and decreasing production.
In simple words: Samuelson states that marginal cost is the extra cost to produce one more (or one less) unit of output at any given production level.

🎯 Exam Tip: Note that Samuelson's definition emphasizes flexibility, applying to both increases and decreases in output.

 

Question 29. Write down the definition of Long-term Average Cost Curve or Envelope Curve given by 'Mansfield'?
Answer: Mansfield defined the long-term average cost curve (also known as the envelope curve) as: "That curve which shows the minimum cost per unit of producing each output level corresponding to different scales of productivity." It essentially traces the lowest possible average cost for any given output level when all factors can be adjusted.
In simple words: Mansfield described the long-term average cost curve as the curve showing the lowest cost per unit for making any amount of product, considering all possible factory sizes.

🎯 Exam Tip: The term "envelope curve" is important, as the LAC curve literally "envelopes" or touches the lowest points of all short-run average cost curves.

 

Question 30. Define Long-term marginal cost according to Ferguson?
Answer: Ferguson defined long-term marginal cost as: "The addition to total cost attributable to an additional unit of output when all inputs are optionally adjusted." This means it's the extra cost of one more unit of output when a firm has enough time to change all its production factors.
In simple words: Ferguson said long-term marginal cost is the extra total cost when you make one more unit, assuming you can change all your production resources as needed.

🎯 Exam Tip: The key differentiator for long-term marginal cost is that *all* inputs are adjustable, unlike in the short term where some are fixed.

RBSE Class 12 Economics Chapter 8 Short Answer Type Questions

 

Question 1. Differentiate between Fixed Costs and Variable Costs.
Answer: Here is a comparison of fixed costs and variable costs:

In simple words: Fixed costs stay the same no matter how much you make, like rent. Variable costs change with how much you make, like raw materials.

🎯 Exam Tip: When differentiating, use clear, distinct points for comparison. Providing examples for each type of cost strengthens your answer.

 

Question 2. Write a comment on the quote "Opportunity Costs Means Opportunity Lost”.
Answer: The saying "Opportunity Cost Means Opportunity Lost" highlights that every choice involves giving up the next best alternative. For example, if a clerk earning Rs 2,000 per month gets a new supervisor job for more money, the Rs 2,000 salary from the old job is the opportunity cost. It is the benefit that was given up by choosing the new role. This demonstrates how choosing one option means losing out on the benefits of the best unchosen option.
In simple words: When you choose one thing, you lose the chance to have the next best thing. That lost chance is called opportunity cost.

🎯 Exam Tip: Use a real-world example to illustrate opportunity cost, making the concept more relatable and easier to understand.

 

Question 3. Show AC, AVC, AFC and MC in one diagram.
Answer: Below is a diagram showing the Average Variable Cost (AVC) and Average Fixed Cost (AFC) curves. Typically, Average Cost (AC) and Marginal Cost (MC) curves are also included to show their relationships. The AFC curve always falls as output increases, while the AVC curve is generally U-shaped, first falling and then rising.
In simple words: The diagram shows that the Average Fixed Cost (AFC) goes down as more items are made, while the Average Variable Cost (AVC) first drops and then rises, forming a 'U' shape.

🎯 Exam Tip: Practice drawing these curves accurately. Remember that AFC is always falling, and AVC is typically U-shaped, starting above AFC.

 

Question 4. How is short period marginal cost estimated?
Answer: Short period marginal cost (MC) can be found by looking at the change in either Total Variable Cost (TVC) or Total Cost (TC) when one more unit is produced. This is because fixed costs remain constant. The formulas are:
\( \text{MC} = \text{TC}_n - \text{TC}_{n-1} \)
\( \implies \text{MC} = (\text{TFC}_n + \text{TVC}_n) - (\text{TFC}_{n-1} + \text{TVC}_{n-1}) \)
\( \implies \text{MC} = \text{TVC}_n - \text{TVC}_{n-1} \) (since \( \text{TFC}_n = \text{TFC}_{n-1} \) because TFC is constant) So, marginal cost is essentially the change in total variable cost.
In simple words: You find marginal cost by subtracting the total cost of the previous item from the total cost of the current item, or by just looking at the change in variable costs.

🎯 Exam Tip: Understand that in the short run, marginal cost is only affected by variable costs, as fixed costs do not change with output.

 

Question 5. Explain the relation between marginal cost and average cost.
Answer: The relationship between marginal cost (MC) and average cost (AC) is key to understanding production.
(a) Both MC and AC are derived from Total Cost (TC).
(b) When the AC is decreasing, the MC is also decreasing and is always below the AC curve.
(c) When the AC is increasing, the MC is also increasing and is always above the AC curve.
(d) When the AC is at its lowest point (minimum), the MC curve intersects it at that very point. This point is known as the optimum point of production.
In simple words: When average cost falls, marginal cost is below it. When average cost rises, marginal cost is above it. When average cost is at its lowest, marginal cost crosses it.

🎯 Exam Tip: The intersection of MC and AC at AC's minimum point is crucial for diagrams and theoretical explanations; make sure to illustrate this relationship clearly.

 

Question 6. Why are AVC, ATC and MC curves U-shaped?
Answer: The Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC) curves are typically U-shaped because of the Law of Variable Proportions (or diminishing returns). This law says that as you add more of a variable input (like labor) to a fixed input (like machinery), output first increases more and more, then it increases less, and eventually starts to decrease. When output increases quickly, costs per unit fall, making the curves go down. When output increases slowly or starts to fall, costs per unit go up, making the curves rise. Specifically, when marginal product (MP) rises, MC falls. When MP falls, MC rises. This relationship affects the AVC and ATC curves, giving them their characteristic U-shape.
In simple words: These cost curves are U-shaped because of a rule called the Law of Variable Proportions. This rule means that at first, making more items becomes cheaper per item, but after a point, it becomes more expensive per item.

🎯 Exam Tip: When explaining the U-shape of cost curves, always link it directly to the Law of Variable Proportions and its stages (increasing, diminishing, and negative returns).

 

Question 8. Define Average Cost and Marginal Cost.
Answer:
**Average Cost:** According to Dooley, average cost is the total cost for each unit produced. It is found by dividing the total cost of production by the total number of units made. For example, if the total cost for 600 units is Rs 1,200, the average cost per unit is:
\( \text{Average Cost (AC)} = \frac { \text{Total Cost (TC)} }{ \text{Output (Q)} } \)
\( \implies \text{AC} = \frac { \text{Rs } 1,200 }{ 600 } \)
\( \implies \text{AC} = \text{Rs } 2 \)
**Marginal Cost:** Ferguson defines marginal cost as the extra cost added to the total cost when one more unit of output is produced. For instance, if the total cost for 6 units is Rs 120 and for 8 units is Rs 180, the marginal cost is:
\( \text{MC} = \frac { \Delta \text{TC} }{ \Delta \text{Q} } \)
\( \implies \text{MC} = \frac { 180 - 120 }{ 8 - 6 } \)
\( \implies \text{MC} = \frac { 60 }{ 2 } \)
\( \implies \text{MC} = \text{Rs } 30 \)
In simple words: Average cost is the total cost divided by units made. Marginal cost is the extra cost to make one more unit.

🎯 Exam Tip: When defining both terms, ensure you provide clear formulas and simple numerical examples to illustrate the calculations effectively.

 

Question 9. Illustrate the concept of Variable Cost with the help of a table and diagram.
Answer: Variable costs are the expenses directly related to the amount of goods produced. They change as the level of output changes. When a company produces more, variable costs increase, and when production decreases, variable costs also decrease. Examples include raw materials and wages for temporary workers. This relationship is often shown using a table and a diagram.
Here is a table illustrating variable costs at different output levels:

This table clearly shows that as the output increases, the total variable cost also increases. When no units are produced, the variable cost is zero. For example, it costs Rs 10 to produce one unit and Rs 38 to produce six units. A diagram would typically show an upward-sloping curve, illustrating this direct relationship.
In simple words: Variable costs go up when you make more items and go down when you make fewer. The table shows this, starting at zero cost for zero items and increasing with more output.

🎯 Exam Tip: Always remember that variable costs are directly tied to production volume, meaning they are zero when production is zero. Fixed costs, however, remain even with no output.

 

Question 10. Why is short-term average cost curve U-shaped?
Answer: The short-term average cost (AC) curve has a U-shape because of how average fixed costs (AFC) and average variable costs (AVC) behave. Initially, as output increases, AFC falls continuously. AVC also falls at first due to more efficient use of resources. This combined effect makes the AC curve fall. However, beyond a certain point, diminishing returns set in for variable inputs, causing AVC to start rising sharply. Even though AFC continues to fall, the rise in AVC is strong enough to pull the AC curve upwards, resulting in the U-shape. The lowest point of the AC curve is called the optimum point.
In simple words: The short-term average cost curve is U-shaped because at first, making more items lowers the cost per item, but after a certain point, it becomes more expensive per item due to things like crowding or less efficient workers.

🎯 Exam Tip: Focus on how the behavior of both AFC (always falling) and AVC (U-shaped due to law of variable proportions) combine to give the AC curve its U-shape.

 

Question 11. Explain the relationship between Average and Marginal Cost curves.
Answer: The relationship between marginal cost (MC) and average cost (AC) is crucial in economics.
1. **When MC is less than AC:** If the cost of producing an extra unit (MC) is lower than the current average cost, then the average cost will fall. Think of it like a new student scoring lower than the class average, pulling the average down.
2. **When MC is greater than AC:** If the cost of producing an extra unit (MC) is higher than the current average cost, then the average cost will rise. This is like a new student scoring higher than the class average, pulling the average up.
3. **When MC equals AC:** When the marginal cost is exactly equal to the average cost, the average cost is at its minimum point. At this point, making one more unit costs exactly the same as the average cost of all units produced so far.
This dynamic explains why the MC curve always intersects the AC curve at its lowest point.
In simple words: If the cost of making one more item (marginal cost) is less than the average cost, the average cost will go down. If it's more, the average cost will go up. They meet when the average cost is at its lowest.

🎯 Exam Tip: Remember the three key rules for MC and AC interaction: MC < AC means AC falls; MC > AC means AC rises; MC = AC at AC's minimum. This is often tested with diagrams.

 

Question 12. Explain the concept of cost function. How is the long period average cost curve obtained?
Answer:
**Concept of Cost Function:** A cost function shows how the total cost of production is related to the quantity of output produced. It helps a business find the cheapest way to make different amounts of goods by figuring out the best mix of inputs for each output level. Mathematically, it can be written as:
\( \text{C} = \text{f}(\text{Q}) \)
Where \( \text{C} \) stands for the total cost of production, and \( \text{Q} \) stands for the quantity of output. This equation simply means that cost depends on output.
**Long Period Average Cost Curve:** The long-run average cost (LAC) curve is formed by combining the minimum points of many short-run average cost (SAC) curves. It represents the lowest average cost of producing any given output when a firm can change all its inputs, including the size of its plant. This curve helps in planning for different production scales.
In simple words: A cost function is a formula that tells you the total cost for making a certain amount of goods. The long-run average cost curve is like a line that touches the lowest points of many smaller, short-run cost curves, showing the cheapest way to produce at different levels over a long time.

🎯 Exam Tip: When defining the cost function, always specify that it relates cost to output. For LAC, emphasize its role in long-term planning and its "envelope" nature.

 

Question 13. Distinguish between the Accounting Costs and non-accounting Costs.
Answer:
**Accounting Costs (Explicit Costs):** These are the actual money payments made by a firm to outsiders for resources and services. They are directly recorded in the financial books. Examples include wages paid to employees, rent for buildings, and raw material costs.
**Non-Accounting Costs (Implicit Costs):** These are the costs of using resources that the firm or entrepreneur already owns and does not pay cash for. They represent the opportunity cost of using these self-owned resources. Examples include the salary the entrepreneur could have earned working elsewhere, or the rent the entrepreneur could have received by renting out their own building.
**Relationship:** Economic cost considers both explicit (accounting) and implicit (non-accounting) costs.
\( \text{Economic Cost} = \text{Accounting Cost (Explicit Cost)} + \text{Non-Accounting Cost (Implicit Cost)} \)
Consequently, accounting profit (total revenue minus explicit costs) is usually higher than economic profit (total revenue minus both explicit and implicit costs).
In simple words: Accounting costs are the actual cash payments a business makes to others. Non-accounting costs are the value of things the business owner already owns and uses, like their own time or building, even if no money changes hands.

🎯 Exam Tip: Clearly distinguish between the monetary nature of accounting costs and the opportunity cost nature of non-accounting (implicit) costs. This is crucial for understanding economic profit.

 

Question 14. Differentiate between Opportunity cost and Real cost.
Answer:
**Opportunity Cost:** This is the value of the next best alternative that you give up when you make a choice. It's about scarcity and choosing how to use limited resources. For example, if the resources used to make a car could have made army equipment instead, then the forgone army equipment is the opportunity cost of the car. It is a decision-based concept.
**Real Cost:** This refers to the non-monetary sacrifices involved in production, such as the effort, pain, discomfort, or waiting (abstinence) of labor and capital owners. Marshall defines it as "The exertion of all different kinds of labour that are directly or indirectly involved in making it, together with the abstinences or rather the waiting required, for saving the capital used in making it; all these sacrifices together will be called the real costs of production of the commodity." Real cost focuses on the human element of production.
In simple words: Opportunity cost is what you give up when you choose something else. Real cost is about the human effort, pain, and sacrifice involved in making things, not just the money.

🎯 Exam Tip: Highlight that opportunity cost is a forward-looking decision cost (what you give up), while real cost is a backward-looking input cost (human effort, sacrifice).

 

Question 15. What is the utility of LAC Curve?
Answer: The Long-run Average Cost (LAC) curve is very useful for businesses in planning their optimal scale of production. It helps a firm decide the most efficient factory size or plant capacity to use for producing any desired level of output at the lowest possible cost over a long period. By looking at the LAC curve, managers can choose the best combination of fixed and variable inputs to minimize costs as they expand or contract. This planning is crucial for long-term survival and profitability.
In simple words: The LAC curve helps a business choose the best factory size to make products at the lowest cost in the long run.

🎯 Exam Tip: Emphasize that LAC's primary utility is for long-term strategic planning, allowing firms to adjust all inputs to achieve optimal scale.

 

Question 16. What is Long-run Average Cost Curve or Envelope Curve?
Answer: The Long-run Average Cost (LAC) curve, also known as the Envelope Curve, shows the lowest possible cost per unit for producing different amounts of output over a long period. In the long run, all production factors can be changed. Mansfield defined it as "That curve which shows the minimum cost per unit of producing each output level corresponding to different scales of productivity." It essentially connects the lowest points of all possible short-run average cost curves, demonstrating the most efficient way to produce at various scales.
In simple words: The Long-run Average Cost curve is a special curve that shows the absolute lowest cost to make each item when a company can change everything about its production, including the size of its factory.

🎯 Exam Tip: Remember to mention both names ("Long-run Average Cost Curve" and "Envelope Curve") and explain why it's called an envelope curve (because it 'envelops' the short-run curves).

 

Question 17. How does LAC curve's U-shape depend upon returns to scale? Explain.
Answer: The 'U' shape of the Long-run Average Cost (LAC) curve is directly influenced by the concept of returns to scale. Returns to scale describe how output changes when all inputs are increased proportionally.
Here's how it works:

Initially, as a firm grows, it experiences **increasing returns to scale**, leading to lower per-unit costs, so LAC falls. Then, it might reach a stage of **constant returns to scale**, where LAC is at its minimum. Finally, if it grows too large, it can face **decreasing returns to scale**, causing LAC to rise. This traditional pattern forms the 'U' shape. In modern times, the LAC curve might appear 'L' shaped after achieving maximum economies of scale.
In simple words: The LAC curve is U-shaped because at first, making more things makes them cheaper (increasing returns), then costs are lowest (constant returns), and finally, making too many makes them more expensive (decreasing returns).

🎯 Exam Tip: Clearly explain each stage of returns to scale (increasing, constant, decreasing) and how each stage impacts the behavior of the LAC curve, linking it to economies and diseconomies of scale.

 

Question 18. Why is the shape of Average Fixed Cost curve a hyperbola?
Answer: The Average Fixed Cost (AFC) curve has the shape of a rectangular hyperbola. This is because total fixed cost (TFC) remains constant regardless of the output level. Average fixed cost is calculated by dividing total fixed cost by the quantity of output (AFC = TFC/Q). As output (Q) increases, the same fixed cost is spread over more and more units, causing AFC to continuously decrease. However, it will never reach zero. This inverse relationship between output and AFC, where their product (TFC) is constant, is the definition of a rectangular hyperbola.
In simple words: The Average Fixed Cost curve looks like a hyperbola because fixed costs never change, so as you make more items, the fixed cost per item just keeps getting smaller and smaller, but never reaches zero.

🎯 Exam Tip: The key point here is the inverse relationship between output and AFC, with TFC acting as a constant. This mathematical property directly results in the hyperbolic shape.

RBSE Class 12 Economics Chapter 8 Essay Type Questions

 

Question 1. What is Total cost, Average cost and Marginal cost? Explain the relationship between Average cost and Marginal cost.
Answer:
**(i) Total Cost (TC):** Total cost is the sum of all expenses a firm incurs to produce a certain quantity of goods. It includes both total fixed costs (TFC), which do not change with output, and total variable costs (TVC), which change with output. As production increases, total cost generally increases.
\( \text{TC} = \text{TFC} + \text{TVC} \)
**(ii) Average Cost (AC):** Average cost, also known as per-unit total cost, is the total cost divided by the total quantity of output produced. It tells a firm the cost to produce each unit on average. In the short run, this is called Short-run Average Cost (SAC).
\( \text{AC} = \frac { \text{Total Cost (TC)} }{ \text{Output (Q)} } \)
**(iii) Marginal Cost (MC):** Marginal cost is the additional cost a firm incurs by producing one more unit of output. It is the change in total cost that happens when output changes by one unit.
\( \text{MC} = \text{TC}_n - \text{TC}_{n-1} \)
This can also be expressed as:
\( \text{MC} = \frac { \Delta \text{TC} }{ \Delta \text{Q} } \)
Where \( \Delta \text{TC} \) is the change in total cost, and \( \Delta \text{Q} \) is the change in output.
**Relationship between Average Cost and Marginal Cost:**
The interaction between Average Cost (AC) and Marginal Cost (MC) is a fundamental concept in economics.
(i) Both AC and MC are derived from the total cost. AC is total cost divided by output, while MC is the change in total cost for an additional unit.
(ii) **When AC is falling:** If the marginal cost (MC) is lower than the average cost (AC), the average cost will continue to fall. This means producing an extra unit is cheaper than the current average, pulling the average down.
(iii) **When AC is rising:** If the marginal cost (MC) is higher than the average cost (AC), the average cost will start to rise. Producing an extra unit costs more than the current average, pushing the average up.
(iv) **When AC is at its minimum:** The marginal cost (MC) curve always intersects the average cost (AC) curve at its lowest point. This is the most efficient production point in the short run.
(v) **Transitional phase:** There can be a short period where AC is still falling while MC has already started to rise. However, MC remains below AC during this phase.
(vi) **Interaction:** The MC curve "pulls" the AC curve. If MC is below AC, it pulls AC down. If MC is above AC, it pulls AC up. When MC equals AC, AC is neither rising nor falling, meaning it's at its minimum. This interaction explains the U-shape of the AC curve.
In simple words: When it costs less to make one extra item (MC) than the average cost per item (AC), the average cost goes down. When it costs more for one extra item, the average cost goes up. They cross each other exactly at the point where the average cost is lowest.

🎯 Exam Tip: To score full marks on this essay question, clearly define each cost concept with its formula, and then provide a detailed explanation of the AC-MC relationship, possibly including a sketch of their curves.

 

Question 2. Why are short-term AC and MC curves U-shaped?
Answer: The short-term Average Cost (AC) and Marginal Cost (MC) curves are U-shaped mainly due to the Law of Variable Proportions. This economic principle explains that as a business adds more of one variable input (like labor) to a fixed input (like machinery), output initially increases at a faster rate, then at a slower rate, and eventually may even decline.
Specifically:
1. **Increasing Returns:** In the beginning, adding more variable input leads to more efficient production, and marginal product (MP) increases. This causes both MC and AC to fall.
2. **Diminishing Returns:** After a certain point, adding more variable input leads to less efficient production, and MP starts to decrease. This means MC begins to rise, and eventually, it pulls the AC curve upwards too.
This changing efficiency of inputs as production increases results in the costs per unit first falling, reaching a minimum, and then rising, which gives the AC, AVC, and MC curves their characteristic U-shape. This also means that AVC (Average Variable Cost) first falls as more units are produced, then starts to rise as efficiency decreases. Therefore, the combined effect leads to the U-shaped nature of both AC and AVC, as dictated by the law of variable proportions.
In simple words: The U-shape of short-term AC and MC curves comes from the Law of Variable Proportions. This law means that efficiency first goes up (costs go down), but then goes down (costs go up) as more and more items are made.

🎯 Exam Tip: When explaining the U-shape of cost curves, always link it directly to the Law of Variable Proportions and its stages (increasing, diminishing, and negative returns).

RBSE Class 12 Economics Chapter 8 Numerical Questions

 

Question 1. Find out Total Cost and Marginal Cost on the basis of the following table:

Answer: To find the Total Cost (TC) and Marginal Cost (MC), we can add Total Fixed Cost (TFC) and Total Variable Cost (TVC) for TC, and calculate the change in TC for MC. Here is the completed table with all cost calculations:
In simple words: Total Cost is fixed cost plus variable cost. Marginal Cost is the change in total cost when production increases. The table shows how these costs change as more units are produced.

🎯 Exam Tip: Remember that Fixed Cost (TFC) does not change, while Variable Cost (TVC) and Total Cost (TC) increase with output. Marginal Cost (MC) is derived from the changes in TC (or TVC).

 

Question 2. From the following data, calculate Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost:

Answer: We can calculate Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC) using the provided data. TC is the sum of TFC and TVC. AFC is TFC divided by output, AVC is TVC divided by output, and ATC is TC divided by output. MC is the change in TC for each additional unit of output.
In simple words: The table shows how different costs are calculated from total fixed costs (TFC) and total variable costs (TVC). You can see that fixed costs stay the same, while other costs change as more items are produced.

🎯 Exam Tip: Remember that AFC, AVC, and ATC are all per-unit costs, calculated by dividing the total cost (or its components) by the quantity of output. Marginal Cost (MC) looks at the *change* in total cost.

 

Question 3. Calculate Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost if :
Answer:

In simple words: This table shows how different types of costs change as a company makes more products. Total Fixed Cost stays the same, while Variable Cost, Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost change with the quantity produced. Each cost is calculated using specific formulas based on the total fixed and variable costs at each output level.

🎯 Exam Tip: Remember that Fixed Cost remains constant regardless of output, and Marginal Cost is the additional cost of producing one more unit.

 

Question 5. From the following data find out Total Fixed Cost, Total Average Fixed Costs, Average Variable Cost, Average Total Cost and Marginal Cost :
Answer:

In simple words: This table shows how total costs and other related costs like fixed, variable, average, and marginal costs are calculated based on the units of output. Fixed costs stay the same, while others change as production increases. The table helps to understand the cost structure of production at different levels.

🎯 Exam Tip: For numerical questions involving tables, always start by identifying the fixed cost (TC at zero output) and then calculate other costs step-by-step using the correct formulas. Double-check your calculations, especially for marginal cost.

 

Question 6. Calculate the Fixed Cost and Variable Cost per unit from the given figures.
Answer:
Total Incremental Cost \( = 7,940 - 5,375 = \text{Rs } 2,565 \)
Incremental output \( = 1,810 - 784 = 1,026 \) units
Variable cost per unit (AVC) \( = \frac{\text{Total Incremental Output}}{\text{Incremental Output}} \)
\( = \frac{2565}{1026} = \text{Rs } 2.50 \)
Total cost for 1,810 units \( = \text{Rs } 7,940 \)
Variable Cost for 1,810 unit \( = 1,810 \times 2.50 = \text{Rs } 4,525 \)
Fixed Cost \( = \text{TC - VC} \)
\( = 7,940 - 4,525 = \text{Rs } 3,415 \)
The Fixed Cost is Rs 3,415 and the Variable Cost per unit is Rs 2.50.
In simple words: First, we find how much the total cost and output changed. Then, we divide the change in cost by the change in output to get the variable cost for each unit. After that, we calculate the total variable cost and subtract it from the total cost to find the fixed cost. Fixed cost is the amount that does not change with production, while variable cost changes with each unit produced.

🎯 Exam Tip: When calculating costs, clearly define what is fixed (doesn't change with output) and what is variable (changes with output). Remember that incremental costs help in finding the variable cost per unit, which is crucial for further calculations.