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Theory of Cost - 2 Video Lecture | Crash Course for CA Foundation
FAQs on Theory of Cost - 2 Video Lecture - Crash Course for CA Foundation
| 1. What are the different types of costs in cost theory? |  |
Ans. In cost theory, the main types of costs include fixed costs, variable costs, total costs, average costs, and marginal costs. Fixed costs remain constant regardless of production levels, while variable costs change with the level of output. Total costs are the sum of fixed and variable costs, average costs are total costs divided by the number of units produced, and marginal costs refer to the additional cost incurred by producing one more unit of a good.
| 2. How do fixed costs and variable costs differ? | |
Ans. Fixed costs are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance. They remain constant even if no output is produced. Variable costs, on the other hand, fluctuate with production levels, including costs like raw materials and direct labor. As production increases, variable costs rise, and they fall when production decreases.
| 3. What is the significance of marginal cost in decision-making? | |
Ans. Marginal cost is crucial in decision-making as it helps businesses determine the cost of producing one additional unit of a product. By comparing marginal cost to marginal revenue, firms can decide whether to increase or decrease production. If the marginal revenue exceeds the marginal cost, it is beneficial to produce more. Conversely, if the marginal cost exceeds the marginal revenue, it may be better to reduce production.
| 4. How can understanding average costs benefit a business? | |
Ans. Understanding average costs allows a business to assess its overall cost structure and pricing strategy. By calculating average costs, a firm can determine the minimum price at which it should sell its products to cover costs and achieve profitability. This analysis can help in budgeting, pricing decisions, and identifying areas where cost efficiencies can be improved.
| 5. What role do economies of scale play in cost theory? | |
Ans. Economies of scale refer to the cost advantages that a business experiences as it increases its level of production. As output rises, fixed costs are spread over more units, leading to a decrease in average costs. This can result in competitive pricing and increased profitability. Understanding economies of scale is essential for businesses as they plan for growth and expansion.
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Sep 09, 2025
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