Test: Production And Costs - 2 - UPSC MCQ

Cost of production is the total price paid for resources used to manufacture a product or create a service to sell to consumers including raw materials, labor, and overhead.

A firm has to pay for the inputs it needs. Therefore, inputs, on the one hand, generate costs and, on the other hand, generate output. We first study the relationship between inputs and the output; that is "production function". Then we look at the relationship between the output and costs; that is cost function.

Money costs mean:
There are several interpretations of what "money costs" mean, but in the context of the given options, the most appropriate definition is:
Money expenditure of a producer in the production process.
Now, let's break down each option and explain why option C is the correct answer:
A: Money expenditure on purchase of goods from the factory
- This option refers to the money spent by consumers to purchase goods from the factory. It does not directly relate to the cost incurred by the producer in the production process.
B: Money spent by the consumers
- This option refers to the money spent by consumers on purchasing goods and services. While consumer spending is important, it is not directly related to the cost incurred by the producer in the production process.
C: Money expenditure of a producer in the production process
- This option accurately describes the cost incurred by the producer in the production process. It includes expenses such as raw materials, labor costs, and overhead expenses.
D: Money expenditure on output
- This option is not specific enough to accurately define money costs. Money expenditure on output could refer to various expenses, including production costs, marketing costs, and distribution costs. It does not specifically focus on the expenses incurred by the producer in the production process.
Therefore, the correct answer is option C: Money expenditure of a producer in the production process.

Total cost is what the firm pays for producing and selling its products. Explicit costs are normal business expenses that are easy to track and appear in the general ledger. Explicit costs are the only costs necessary to calculate a profit, as they clearly affect a company's profits. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. 

Implicit cost is actually the cost that is the consequence of using the assets, instead of lending, selling or renting them. It also means the income that is forgone from making a choice of not to work. Implicit cost is also known as implied cost, notional cost or imputed cost.

“Opportunity cost” of a resource, means the value of the next-highest-valued alternative use of that resource.
E.g. you spend time and money going to a movie, you cannot spend that time at home playing video games, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is playing video games at home, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not playing videos game at home.

Fixed costs are expenses that remain constant for a period of time irrespective of the level of outputs. Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume. Even if the output is nil, fixed costs are incurred.

Revenue for a firm is:
- Money receipts from the sale of output: Revenue represents the total amount of money a company earns from selling its products or services. It includes all the money received by the firm through sales transactions with its customers.
- Average price of a product sold: While the average price of a product sold can contribute to calculating the revenue, it is not the definition of revenue itself. Revenue is the total amount of money received, regardless of the average price of each individual product sold.
- Money spent on producing output: This refers to the cost of production, which is separate from revenue. Revenue is the income generated from selling the output, while the money spent on producing the output is considered an expense or cost.
- Addition to Total revenue after a good is sold: This statement is incorrect. Revenue is the total amount of money received from all sales, not the additional revenue generated after a good is sold.
In conclusion, the correct answer is A: Money receipts from the sale of output. Revenue represents the total amount of money a firm earns from selling its products or services.

Definition of Average Revenue (AR):
Average Revenue (AR) is the total revenue generated per unit of output produced by a firm. It is calculated by dividing the total revenue by the quantity of output.
Explanation:
To understand the concept of Average Revenue (AR), it is important to know the following:
1. Total Revenue (TR): Total revenue is the total amount of money received by a firm from the sale of its goods or services. It is calculated by multiplying the price per unit by the quantity of output sold.
2. Quantity of Output: The quantity of output refers to the number of units of goods or services produced by a firm.
Now, let's break down the options given and determine the correct answer:
A: Total cost per unit produced - This option refers to the cost incurred by a firm to produce each unit of output, which is not related to the concept of average revenue. Therefore, this is not the correct answer.
B: Total Revenue per unit of output - This option correctly defines average revenue. It is the total revenue generated per unit of output produced by a firm. Therefore, this is the correct answer.
C: Total revenue per unit of inputs used - This option refers to the relationship between total revenue and the inputs used by a firm, which is not the same as the concept of average revenue. Therefore, this is not the correct answer.
D: Sum of Total Revenue and price - This option is incorrect as it suggests adding total revenue and price, which is not the definition of average revenue.
Therefore, the correct answer is B: Total Revenue per unit of output.

The law of supply is the microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

Market Supply : The horizontal summation of all the individual firm supply curves. A market supply curve shows what quantity will be supplied by all firms at various prices. or service. The impact of a surplus in a market is to drive prices down and to increase the quantity traded.

The Supply Curve of a Firm
The supply curve of a firm is a graphical representation of the quantity of goods or services that a firm is willing and able to supply at various prices. It depicts the relationship between the price of a product and the quantity of that product that a firm is willing to produce and sell in a given time period.
Key Points:
- The supply curve slopes upward from left to right, indicating a positive relationship between price and quantity supplied.
- The quantity supplied is shown on the horizontal axis, while the price is shown on the vertical axis.
- The supply curve is usually depicted as a straight line or an upward-sloping curve.
- The shape of the supply curve can vary depending on factors such as production costs, technology, and government regulations.
- The supply curve shows the firm's response to changes in price, assuming that all other factors remain constant.
- When the price of a product increases, the firm has an incentive to increase its production and supply more of the product.
- Conversely, when the price decreases, the firm may reduce its production and supply less of the product.
Overall, the supply curve of a firm provides valuable information about the quantity of goods or services that a firm is willing and able to supply at different price levels. It helps in understanding the behavior of firms in response to changes in market conditions and assists in analyzing market equilibrium and the determination of prices.

The elasticity of supply measures:
The degree of responsiveness of quantity supplied at a particular price. This means that it measures how sensitive the quantity supplied is to changes in price. It is important in determining how producers will react to changes in market conditions and price fluctuations.
Key Points:
- Elasticity of supply is a measure of how much the quantity supplied changes in response to a change in price.
- It indicates the flexibility of producers to adjust their output levels in response to changes in price.
- The elasticity of supply can be influenced by various factors such as production costs, availability of inputs, and the time period under consideration.
- A high elasticity of supply means that producers can easily increase or decrease their output in response to price changes, indicating a more flexible supply curve.
- On the other hand, a low elasticity of supply suggests that producers have limited ability to adjust their output levels, resulting in a less flexible supply curve.
- The elasticity of supply is typically positive, as an increase in price usually leads to an increase in quantity supplied, and vice versa.
- However, the extent of the increase or decrease in quantity supplied will depend on the magnitude of the elasticity coefficient.
- Elasticity of supply is an important concept in economics as it helps to understand the responsiveness of producers to changes in market conditions and price signals.
- It is also crucial in determining the incidence of taxes or subsidies on producers and the overall market equilibrium.

Supply Schedule Definition:
A supply schedule is a tabular representation that shows the quantity of a good or service that suppliers are willing and able to produce and sell at various prices.
Explanation:
The supply schedule is used to illustrate the relationship between price and quantity supplied in the market. It provides valuable information about the behavior of suppliers and their response to changes in price.
Key Points:
- The supply schedule is presented in a table format.
- It lists different prices in one column and the corresponding quantity supplied in another column.
- The quantity supplied represents the amount of a product that producers are willing to sell at a particular price.
- The supply schedule helps to identify the law of supply, which states that as the price of a product increases, the quantity supplied also increases, ceteris paribus.
- It allows for the analysis of market equilibrium, where the quantity supplied equals the quantity demanded.
- The supply schedule can be used to create a graphical representation known as the supply curve, which shows the relationship between price and quantity supplied in a visual format.
Conclusion:
A supply schedule is a tabular representation that provides information about the quantity supplied at different prices. It is an essential tool in understanding the behavior of suppliers and analyzing market dynamics.

Marginal revenue is the increase in revenue that results from the sale of one additional unit of output. Marginal revenue helps a company identify the revenue generated from one additional unit of production. A company that is looking to maximize its profits will produce up to the point where marginal cost equals marginal revenue.

TFC curve is a horizontal straight line parallel to X-axis showing that total fixed costs remain same at all levels of output. 

Variable costs vary with output because:
- Expenditure on variable factors: Variable costs are the expenses that change with the level of output. They include costs such as direct labor, raw materials, and utilities. These costs vary because they are directly related to the quantity of input used in the production process. As the output increases, more variable factors are required, leading to an increase in variable costs.
- Short-run flexibility: Variable costs can be adjusted in the short run to accommodate changes in output. For example, a company may hire more workers or purchase additional raw materials to meet increased demand. Conversely, if demand decreases, the company can reduce its variable costs by scaling back on labor or raw material purchases. This flexibility allows businesses to adapt to changing market conditions.
- Cost behavior patterns: Variable costs exhibit a linear relationship with output. This means that as output increases, variable costs also increase proportionally. For example, if a company produces 100 units of a product and incurs $100 in variable costs, producing 200 units would result in $200 in variable costs. This pattern of cost behavior is in contrast to fixed costs, which remain constant regardless of output.
- Long-run adjustments: While variable costs may vary in the short run, they may not necessarily remain constant in the long run. In the long run, businesses have more flexibility to adjust their production processes and make changes to their fixed costs. These adjustments can lead to changes in the composition of variable costs. For example, a company may invest in new technology or equipment that reduces the amount of labor required, resulting in a decrease in variable labor costs.
In summary, variable costs vary with output because they are directly related to the quantity of input used in the production process and can be adjusted in the short run to accommodate changes in output. These costs exhibit a linear relationship with output and can also be influenced by long-run adjustments to production processes.

The opportunity cost incurred per unit of good produced. This is calculated by dividing the cost of production by the quantity of output produced.
Average cost is a general notion of the per unit cost incurred in the production of a good or service. It is specified as the total cost divided by the quantity of output.

Explanation:
The relationship between AVC (Average Variable Cost), AFC (Average Fixed Cost), and ATC (Average Total Cost) can be understood by breaking down each term:
1. AVC (Average Variable Cost):
- Represents the cost per unit of variable inputs (e.g., labor, raw materials) required to produce a given quantity of output.
- Calculated by dividing total variable cost by the quantity of output produced.
- AVC = Total Variable Cost / Quantity of Output
2. AFC (Average Fixed Cost):
- Represents the cost per unit of fixed inputs (e.g., rent, machinery) required to produce a given quantity of output.
- Calculated by dividing total fixed cost by the quantity of output produced.
- AFC = Total Fixed Cost / Quantity of Output
3. ATC (Average Total Cost):
- Represents the total cost per unit of output, including both fixed and variable costs.
- Calculated by dividing total cost by the quantity of output produced.
- ATC = Total Cost / Quantity of Output
Now, let's understand the relationship between these terms:
- AVC + AFC = ATC
- This means that the average variable cost (AVC) and average fixed cost (AFC) together make up the average total cost (ATC).
- The AVC represents the variable portion of the cost, while the AFC represents the fixed portion.
- When these costs are combined, we get the total cost per unit of output, which is the ATC.
Therefore, the correct option is B: AVC + AFC = ATC.

Relationship between TFC, TVC, and TC. Total fixed cost (TFC) is represented by a straight line parallel to X-axis and it remains unchanged for all output levels in a time period. ... TC is the sum of TFC and TVC. When no variable output is added, TC is equal to TFC.