Reason Based Question’s
(Q1) “ MC can be calculated both from total cost and total variable cost and is not affected by total fixed cost”.
(Q2) (a) Average fixed cost can be more than the average variable cost at any level of output
(b) Average variable cost can be more than average cost at any level of output ?
Ans: (a) Yes. , AFC is derived from TFC and AVC is derived from TVC. There is no relationship between TFC and TVC.
(b) Ans: F.
(Q3) When a bus with a seating capacity of 35 passengers is carrying only 30 passengers, the MC of carrying an additional passenger would be equal to the cost of a passenger ticket.
Ans: False. MC of carrying an additional passenger should be zero , because there is excess seating capacity in the bus.
(Q4) When MC of carrying an additional passenger in a coach is zero, more passengers should always be added to make more profits.
Ans: False. The capacity of coach is limited.
(Q5) State with valid reasons which of the following are true/false.
(a) TFC and TC have common starting point.
(b) TVC is an ‘S’ shaped curve.
(c) Marginal Cost Curve is the mirror view of Average Variable Cost Curve.
Ans: T , T , F
(Q6) The concept of fixed cost is relevant for short period as well as for long period.
(Q7) Average cost can rise even when marginal cost is falling.
(Q8) Total fixed cost curve is a vertical straight line, parallel to Y-axis
(Q9) Total cost can be obtained as summation of marginal costs.
(Q10) If 10 units cost Rs. 36 to produce and 12 units cost Rs. 50, then marginal cost is equal to Rs. 14.
Ans: F , it is Rs 7
(Q11) When we consider costs in economics, we include explicit cost only.
(Q12) Costs that have been already incurred are important factors in making production decisions.
Ans: False Costs that are still to be incurred are important factors in making production decisions.
(Q13) Explicit cost includes opportunity cost of resources owned and used by the firm’s owners.
Ans: False. It is the ‘implicit Cost’ and not the explicit cost. Explicit cost is the actual payment made to outsiders for hiring their factor services.
(Q14) The MC curve may be rising or falling just before it becomes equal to AVC and ATC curves.
Ans: False. MC curve is always rising before it becomes equal to AVC and ATC
(Q15) All per unit cost curves (i.e. AC, AVC and AFC curves) are U-shaped.
(Q16)(a) Fixed cost is constant even when output is zero.
(b) Variable cost is incurred before production is started
(c) Fixed cost must be greater than variable cost when output is zero.
(d) Variable cost reduces as output increases.
(e) Average cost includes both fixed cost and variable cost.
Ans: T , F, T , F ,T
(Q17) Average variable cost tends to fall, stabilise and rise as output increases.
Ans: True , due to the law of variable proportions.
(Q18) MC is greater than AC when production is in a state of diminishing returns.
Ans: True , MC will be rising in diminishing returns . AC is rising, with the rising MC but MC > AC.
(Q19) AC is greater than MC, so long as AC is falling.
(Q20) Area under MC curve = TVC.
(Q21) Average cost does not fall unless marginal cost also falls
(Q22) Average variable cost decreases at a slower rate as compared to decrease in average cost.
(Q23) AC can decrease even if MC increase with increase in level of production.
EXTRA QUESTION ’s
(Q1) An individual started his own business and started earning 2 lakh rupees per month. He worked 7 days a week for 12 hours a day. What will be the real cost incurred in the business ?
Ans: Real cost refers to the sacrifice , discomfort and pain involved while supplying factors of production by their owners. However, in this case the real cost is the sacrifice made by working on Sundays and discomfort of working for more than 8 hours a day both by the owner as well as the factors of production.
(Q2) Why does the minimum point of AC curve fall towards right of AVC curve ? , OR
Why does AVC reaches its minimum point before the capacity output ?
Ans: The minimum point of AC cure fall towards right of AVC curve because AC continues to fall due to decreasing AFC even after AVC starts rising.
(Q3) Answer the following questions:
(a) Why does AFC curve never touch the X-axis ?
(b) Why does AVC curve start from origin ?
(c) Why AC, AVC and MC curves are U-shaped ?
(d) Why are the gap between TC and TVC curve remains constant with rise in output ?
(e) Why does AC curve lie above the AVC curve ?
(f) Why does TC curve and TFC curve start from the same point above the origin?
(a) AFC curve never touches the X-axis as TFC can never to zero.
(b) TVC curve starts from origin because TVC is zero at zero level of output.
(c) AC, AVC and MC curves are U-shaped because of Law of Variable Proportions.
(d) The gap between them is TFC, which remains same with rise in output.
(e) AC curve lies above the AVC curve because AC includes both AVC and AFC at all levels of output.
(f) It happens because both TC and TFC are same at zero level of output.
(Q4) Can average total cost be less than average variable cost at any level of output ? Why or why not ?
Ans: No , because AC includes both AVC and AFC at all levels of output.
(Q5) You are the owner of a firm that is currently losing Rs. 2000 per month, with fixed costs per month of Rs. 1600. You are advised to stop production. Should you accept the advice ? Why and why not?
Ans: Yes, because you will lose less money (Rs. 1600 rather than Rs. 2000) if you stop production
(Q6) Land Acquisition Act in India has led to a considerable rise in compensation to the farmers whose land is acquired for the establishment of industry.
(a) How is it going to impact the cost structure of new industry ?
(b) Will it work as an inducement or a deterrent for the new industry ?
Ans: a) Fixed cost increases , land availability becomes expensive , (b) deterrent
(Q7) During the market period all costs are fixed costs. How ?
Ans: Market period is a period in which production cannot be increased by way of greater application of the factors. Implying that all factors are fixed factors during the market period. Hence, all costs during the market period are fixed costs.
(Q8) Small producers are often exempted from excise duty. Do you think this keeps their cost of production lower than the big producers and therefore, they earn higher profit per unit of output?
Ans: A cut in the excise duty reduce the average and marginal cost , leading to rise in profit margin (other things remaining constant). However, this does not necessarily mean higher profit margin for the small producers compared to the big producers.
Big producers enjoy economics of scale leading to lower cost per unit of output. Often, the profit margins are found to be higher for the big producers than the small producers.
(Q9) FDI not only brings investment in the domestic economy, it also brings new technology. How would the availability of new technology (relating to auto industry) impact the short period production function of a car manufacturer in India?
Ans: When new technology is available, the whole production function would shift: more output would be available from the same quantity of inputs. Thus, the availability of new technology (relating to auto industry) would shift the AC curve (of a car manufacturer) downward. It would prompt him to produce more at the given price.
(Q10) State one good, and one bad impact of ‘Make in India’ campaign on the cost structure of the domestic industry.
Ans: Good Impact : It is expected to bring cost-efficient technology in the domestic economy and lower its cost structure.
Bad Impact : Only big business companies are expected to come to the domestic market which would purchase inputs in the domestic market in large scale . This may lead to a rise in input prices in the domestic market. Accordingly, the cost structure of the domestic producers may tend to rise.
(Q11) “Discovery of natural gas in the international market leads to a cut in the petrol and diesel prices” Explain the economic theory to analyse the impact of the statement on the cost of production of the transport firms in India. Also analyse its impact on the cost of transportation.
Ans: India meets its domestic demand for petrol and diesel largely through imports. Accordingly, a cut in their price in the international market leads to cut in price in the domestic market as well. Other things remaining constant, it would lead to lower cost for the transportation of goods across different places.
(Q12) Electricity tariff is increased for the commercial use. Would it affect fixed cost or variable cost of the industry ? Explain with a reason.
Ans: Electricity cost is a component of variable cost , not the fixed cost. . Accordingly, increase in electricity tariff would increase variable cost of the industry.
(Q13) ‘ SAC finally must rise’ . Do you agree ? ,
AC curve must eventually rise during the short period. Do you agree ?
Ans: Yes , Diminishing Marginal returns to a factor lead to rising AVC. Hence, AC curve must eventually rise during the short period. This happens even when AFC is falling.
(Q14) What will be the relationship between Marginal Cost and Average Cost , when Marginal Cost is constant ? Can MC cut AC from its lowest point ?
Ans: When MC is constant with an increase in its production, AC will also be constant to it. Such a relation is found in case of constant returns to a factor . MC, in this situation cannot cut AC from its lowest point.
(Q15) ‘Cost of production is zero, when output is zero’. Do you agree with the statement ?
Ans: No, we don’t agree with the statement because cost of production comprises some fixed costs as well as variable costs. Fixed costs are incurred even when output is zero e.g., expenses on building, basic infrastructure and management are incurred even output has not started yet. Thus cost of production is positive, even output is zero.
(Q16) ‘Why Marginal cost curve does not start from Y-Axis’ ? Comment if you agree ?
Ans: Yes , It is because of the reason that MC does not include fixed costs in it. If level of output is zero , variable cost will also be zero and MC being zero, MC curve can’t start from Y-Axis. However, it will become U-shaped due law of variable proportion
(Q17) Can there be some fixed costs in the long run ? If not, why ?
Ans: NO , In the long run all factors are variable and the distinction between fixed and variable factors disappears . Therefore, all costs are variable costs only. Hence there are no fixed costs in the long run.
(Q18) Do fixed cost affect Marginal Cost ? or MC is only a variable cost. Why ?
(Q19) The cost of zero level of output is equal to which cost ?
(Q20) The two inversely S-shaped short run cost curves are parallel to each other and maintain a constant distance of Rs. 50. Which cost is indicated by Rs. 50 ? Also, identify the two inversely S-shaped short run cost curves.
(Q21) A firm withdraws Rs. 10,000 from its fixed deposits with the bank and uses the money for the purchase of factory equipment. Find the cost of this investment. , OR
An industrialist withdraws Rs. 10,000 from his term deposits and purchases a generation set. It involves an element both of explicit cost as well as implicit cost. Explain this fact with a reason.
(Q22) The relationship between Marginal Cost and Average Variable Cost is similar to the relationship between Marginal Cost and Average Cost.’ D you agree? Why so? Explain
(Q23) MC can be measured both as the difference between TCa and TCa-1 as well as the difference between TVCa and TVCa-1. How ?
(Q24) ‘ When does ATC curve joins or intersects AVC’ ? Why or why not ?
(Q25) AFC Curve always falls as the level of output is increased. But AVC curve is a U-shaped curve. Why ? Explain fully.