Worksheet Solutions: Production and Costs - 2 | Economics Class 11 - Commerce PDF Download

Fill in the Blanks

Q1: Cost function studies the functional relationship between __________ and cost of production.
Ans: output (Q)
Cost function examines how the cost of production varies with changes in the level of output, denoted by Q.

Q2: Money expenditure incurred by a firm in the production of a commodity is called the _________.
Ans: cost of production
This is a straightforward definition of the cost of production.

Q3: In economics, the total cost of production is the sum of ________ costs.
Ans: explicit
Total cost includes both explicit and implicit costs, where explicit costs are actual monetary expenditures.

Q4: In the short period, costs are categorized into _______ cost and _______ cost.
Ans: fixed cost and variable cost
In the short run, costs can be separated into fixed costs, which do not change with the level of output, and variable costs, which do change with output.

Q5: Fixed costs are incurred on ________ factor of production.
Ans: fixed factor
Fixed costs are expenses associated with the fixed factors of production, such as rent and equipment.

Q6: Total fixed cost (TFC) is maximum loss a producer can suffer and is also known as _________.
Ans: supplement cost
TFC represents the maximum loss a producer can incur because it is a fixed expense. It's also known by other terms like supplement cost.

Q7: Marginal cost (MC) is the additional cost incurred for the production of an additional _______.
Ans: unit
MC refers to the cost incurred when producing one more unit of a product.

Q8: The relationship between marginal cost (MC) and average cost (AC) is a(n) _______ relationship.
Ans: arithmetic
MC and AC have a mathematical relationship, but this question doesn't specify whether it's a direct or inverse relationship.

Q9: AFC is calculated as Total Fixed Cost (TFC) divided by ________.
Ans: output
AFC is the cost per unit of output and is calculated by dividing TFC by the level of output.

Q10: Implicit costs are calculated by determining the value of _______ in terms of their market price.
Ans: self-occupied factors
Implicit costs are non-monetary costs related to self-owned factors of production, and their value is determined based on what they could earn in the market.

Assertion and Reason Based

Q1: Assertion: Fixed costs are the costs that change with changes in the level of output.
Reason: Fixed costs include expenses like raw materials and labor.
(a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
(c) Assertion is true, but the reason is false.
(d) Both assertion and reason are false.
Ans: (c)
Fixed costs do not change with changes in the level of output. The reason provided is incorrect because it suggests that fixed costs include expenses like raw materials and labor, which is not true.

Q2: Assertion: The Total Cost (TC) curve starts from the point as intercept on the Y-axis.
Reason: Total Fixed Cost (TFC) is zero at zero level of output.
(a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
(c) Assertion is true, but the reason is false.
(d) Both assertion and reason are false.
Ans: (a)
The Total Cost (TC) curve starts from the point as an intercept on the Y-axis because Total Fixed Cost (TFC) is equal to TC at zero levels of output. TFC is the component of TC that remains constant even at zero output.

Q3: Assertion: Marginal cost (MC) is not affected by fixed cost.
Reason: Fixed cost remains constant for all levels of output.
(a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
(c) Assertion is true, but the reason is false.
(d) Both assertion and reason are false.
Ans: (b)
While it is true that MC is not affected by fixed costs, the reason provided does not correctly explain why MC is not affected by fixed costs. MC is solely related to variable costs.

Q4: Assertion: Average Fixed Cost (AFC) goes on decreasing with an increase in output.
Reason: As output increases, the constant fixed cost gets distributed to a larger number of units.
(a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
(c) Assertion is true, but the reason is false.
(d) Both assertion and reason are false.
Ans: (a)
AFC goes on decreasing with an increase in output because the constant fixed cost gets distributed to a larger number of units as output increases.

Q5: Assertion: Marginal Cost (MC) cuts Average Cost (AC) at its minimum point.
Reason: MC and AC have an inverse relationship.
(a) Both assertion and reason are true, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
(c) Assertion is true, but the reason is false.
(d) Both assertion and reason are false.
Ans: (a)
MC cuts AC at its minimum point because AC is minimized where MC equals AC, which is a fundamental characteristic of cost curves.

Very Short Answer Type Questions

Q1: Define cost of production.
Ans: Cost of production is the total expenses incurred by a company in manufacturing a product or providing a service. It includes the cost of raw materials, labor, overhead costs, and other expenses associated with the production process.

Q2: Explain the concept of implicit costs.
Ans: Implicit costs are non-monetary costs associated with self-owned factors of production. These costs are imputed based on what these factors could earn in the market if they were used elsewhere.

Q3: Differentiate between fixed costs and variable costs.
Ans: Fixed costs do not change with changes in the level of output. They remain constant and include expenses like rent and equipment. Variable costs change with the level of output and include expenses like raw materials and labor.

Q4: What is the behavior of Total Fixed Cost (TFC) in the short run?
Ans: In the short period, costs are categorized into fixed cost, which remains constant at all levels of output, and variable cost, which changes with output. However, in the long period, all costs become variable.

Q5: Describe the shape of the Total Fixed Cost (TFC) curve.
Ans: Total Fixed Cost (TFC) represents costs that do not change with changes in output. TFC is the maximum loss a producer can suffer and is also known as supplement cost.

Q6: What is the formula for calculating Total Cost (TC)?
Ans: Total Variable Cost (TVC) represents costs that change with changes in output. TVC includes expenses like raw materials and labor.

Q7: What is the relationship between Total Cost (TC) and Total Variable Cost (TVC)?
Ans: Marginal Cost (MC) is the additional cost incurred for the production of an additional unit. It is calculated by finding the change in total cost when one more unit is produced.

Q8: What does Marginal Cost (MC) represent?
Ans: MC is U-shaped because of the law of variable proportions. Initially, increasing returns lead to cost reduction, but diminishing returns eventually cause costs to rise.

Q9: Explain why Marginal Cost (MC) is U-shaped.
Ans: MC is not affected by fixed costs as they remain constant regardless of the level of output. MC is solely influenced by changes in variable costs.

Q10: How is the relationship between Marginal Cost (MC) and Average Cost (AC) described?
Ans: The relationship between Marginal Cost (MC) and Average Cost (AC) is that MC cuts AC at its minimum point, signifying the point of minimum average cost.

Short Answer Type Questions

Q1: Explain the difference between explicit (accounting) cost and implicit (non-accounting) cost.
Ans: Explicit costs are actual monetary expenditures recorded in the company's books, such as wages paid to employees and rent paid to landlords. Implicit costs are non-monetary and include the opportunity cost of using self-owned resources, like the foregone salary of a business owner who chooses to run their business instead of working elsewhere.

Q2: Discuss the relationship between Total Fixed Cost (TFC) and Total Cost (TC) at zero levels of output.
Ans: At zero levels of output, TFC equals TC, and TVC is zero. This is because TFC is a constant expense, and when no output is produced, variable costs are zero.

Q3: Describe the behavior of Total Variable Cost (TVC) in relation to Total Cost (TC).
Ans: TVC increases as output increases. This is because more output requires more variable inputs like labor and materials.

Q4: Explain the relationship between Marginal Cost (MC) and Average Cost (AC) in terms of their behavior.
Ans: MC is U-shaped because of the law of variable proportions. Initially, as output increases, MC decreases due to increasing returns. After a certain point, diminishing returns set in, causing MC to increase.

Q5: Discuss the concept of Average Fixed Cost (AFC) and why it goes on decreasing with an increase in output.
Ans: AFC decreases with an increase in output because the constant fixed cost gets distributed to a larger number of units, reducing the cost per unit.

Q6: Compare the minimum points of Average Cost (AC) and Average Variable Cost (AVC) curves.
Ans: The minimum point of the Average Variable Cost (AVC) curve occurs at a lower level of output than that of the Average Cost (AC) curve. This is because as output increases, AFC decreases and contributes to a lower minimum point for AVC.

Q7: Why is the gap between Average Cost (AC) and Average Variable Cost (AVC) reduced with an increase in output?
Ans: The gap between AC and AVC decreases with an increase in output because the gap represents the fixed cost (AFC), which declines as more units are produced.

Q8: Provide reasons for the U-shaped behavior of cost curves like AC, AVC, and MC.
Ans: AC, AVC, and MC curves exhibit a U-shaped behavior. Initially, costs decrease due to increasing returns, but after a certain point, diminishing returns cause costs to rise. This U-shape reflects the impact of production and resource utilization on costs.

Long Answer Type Questions

Q1: Explain the fundamental concept of cost of production and its significance in pricing decisions.
Ans: Cost of Production and Its Significance in Pricing Decisions:

• Cost of production encompasses all expenses associated with producing a good or service. These costs include raw materials, labor, overhead, and more.
• Understanding the cost of production is crucial for pricing decisions. To set a competitive and profitable price, a company must consider its production costs, as well as market demand and competition.
• High production costs may necessitate higher selling prices, affecting consumer demand. Conversely, lower costs can allow a company to offer competitive prices.
• Cost analysis helps businesses optimize resource allocation and improve cost efficiency, ultimately impacting pricing strategies.

Q2: Discuss the relationship between Total Cost (TC), Total Fixed Cost (TFC), and Total Variable Cost (TVC) with examples.
Ans: Relationship Between Total Cost (TC), Total Fixed Cost (TFC), and Total Variable Cost (TVC) with Examples:

• TC = TFC + TVC. TFC is the cost that remains constant regardless of output, and TVC changes with output.
• Example: If a factory incurs a fixed cost of $10,000 per month and variable costs of $5,000 for producing 1,000 units, TC = $10,000 + $5,000 = $15,000.
• TFC is like the "overhead" cost, which doesn't change, while TVC is tied to production levels.

Q3: Analyze the behavior of Marginal Cost (MC) in the short run and its implications for production decisions.
Ans: Behavior of Marginal Cost (MC) in the Short Run and Its Implications:

• In the short run, MC initially decreases with increasing output, indicating increasing returns to scale. This means each additional unit adds less to the cost than the previous unit.
• After a point, MC begins to increase due to diminishing returns. Each extra unit contributes more to the cost, leading to cost inefficiency.
• Implications: Firms aim to produce at a level where MC equals the price of the product to maximize profit. If MC < price, they should produce more, and if MC > price, they should produce less. MC behavior guides production decisions.

Q4: Describe the characteristics and implications of the U-shaped cost curves like Average Cost (AC), Average Variable Cost (AVC), and Marginal Cost (MC) in the cost of production.
Ans: Characteristics and Implications of U-Shaped Cost Curves:

• U-shaped cost curves like Average Cost (AC), Average Variable Cost (AVC), and Marginal Cost (MC) exhibit distinct characteristics.
• Initially, costs decrease due to increasing returns and efficient resource utilization, creating the downward slope of the U-shape.
• After a certain point, diminishing returns set in, leading to cost increases, creating the upward slope of the U-shape.
• Implications: The minimum point of AC represents the most cost-efficient level of production. MC cuts AC at this minimum point, helping firms determine the optimal level of production. Understanding these curves guides firms in cost management and pricing decisions.