Test: Production and Costs- Case Based Type Questions - Commerce MCQ
12 Questions MCQ Test - Test: Production and Costs- Case Based Type Questions
Direction: Read the following passage and answer the question that follows:
The production function exhibits technological relationships between physical inputs and outputs and is thus said to belong to the domain of engineering. Prof. Stigler does not agree with this commonly held view. The function of management is to sort out the right type of combination of inputs for the quantity of output he desires.
For this, he has to know the prices of his inputs and the technique to be used for producing a specified output within a specified period of time. All these technical possibilities are derived from applied sciences but cannot be worked out by technologists or engineers alone. ‘The entrepreneurs also provide productive services, and they are far from standardized.
Some men can get gang of workers to do their best, others are better at luring customers, still others at borrowing money, and each will have a different production function. If we take account of activities such as selling, settling strikes and anticipating future styles of product, it is clear that large segments of what we mean by technique are matters of business knowledge and talents, not to be acquired in the best engineering schools.” The production function is, in fact, “the economist’s summary of technological knowledge,” as pointed out by Prof. Stigler.
Q. Who all have a productions function?
Direction: Read the following passage and answer the question that follows:
Agricultural Development Bank of Pakistan uses the production function approach to measuring bank outputs and costs, a trans log cost function is estimated to provide an assessment of the bank’s scale and scope efficiency, and to quantify the extent to which its production costs are sensitive to size and output mix. Results shows that the bank enjoys both overall and product-specific economies of scale and, therefore, there exists scope for the bank to expand its operations at declining average cost.
Even though bank branches in all size categories enjoy economies of scale, the extent of such economies is larger for branches operating at a smaller scale of production. This implies that as the bank branches grow larger in size in terms of both loan and deposit accounts, they move closer to attaining increasing returns to a factor. It is also shown that the marginal costs of servicing both loan and deposit accounts decline as bank branches grow larger in size in terms of either the number of loans or the number of deposits. This confirms that branches operating at a larger scale of production have attained greater cost efficiency in terms of servicing the loan and deposit accounts.
Q. Economies of scale is larger for which type of bank.
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Direction: Read the following passage and answer the question that follows:
Agricultural Development Bank of Pakistan uses the production function approach to measuring bank outputs and costs, a trans log cost function is estimated to provide an assessment of the bank’s scale and scope efficiency, and to quantify the extent to which its production costs are sensitive to size and output mix. Results shows that the bank enjoys both overall and product-specific economies of scale and, therefore, there exists scope for the bank to expand its operations at declining average cost.
Even though bank branches in all size categories enjoy economies of scale, the extent of such economies is larger for branches operating at a smaller scale of production. This implies that as the bank branches grow larger in size in terms of both loan and deposit accounts, they move closer to attaining increasing returns to a factor. It is also shown that the marginal costs of servicing both loan and deposit accounts decline as bank branches grow larger in size in terms of either the number of loans or the number of deposits. This confirms that branches operating at a larger scale of production have attained greater cost efficiency in terms of servicing the loan and deposit accounts.
Q. The increasing returns to scale in larger branches is due to ......................
Direction: Read the following passage and answer the question that follows:
Jordan Cement Factories Company was set up in December 1951 as a share holding company. In March 1954, the company commenced business with the first bag of cement.
In order to ascertain the cost of products for a particular period of time, the company prepares cost sheet, the cost sheet data are collected from various statements of accounts which have been written in cost accounts either on day to day or regular records. The main elements of cost sheet are prime cost,work cost and cost of production.
The main principle that underlines the cost classifications of main elements of the cost is fixed and variable cost basis. The company does not consider any others basis like direct and indirect costs or revenue and capital cost or functional classification for cost classification. Fixed and variable cost is based on the changes in activity or volume. Fixed cost or period cost remain unchanged in spite of changes in volume or activity.
Variable cost or product cost vary in complete proportion to the volume of output. Capital and revenue basis depends on the purpose of expenditure. Any cost incurred in purchasing assets either to earn income or increasing the earning capacity of the business is known as capital cost. But any cost incurred for the purpose of maintaining the earning capacity of the business it is revenue expenditure.
Q. The main principle underlying the cost classification is the main element of the cost in ..................... and ..................... cost basis.
Direction: Read the following passage and answer the question that follows:
Jordan Cement Factories Company was set up in December 1951 as a share holding company. In March 1954, the company commenced business with the first bag of cement.
In order to ascertain the cost of products for a particular period of time, the company prepares cost sheet, the cost sheet data are collected from various statements of accounts which have been written in cost accounts either on day to day or regular records. The main elements of cost sheet are prime cost,work cost and cost of production.
The main principle that underlines the cost classifications of main elements of the cost is fixed and variable cost basis. The company does not consider any others basis like direct and indirect costs or revenue and capital cost or functional classification for cost classification. Fixed and variable cost is based on the changes in activity or volume. Fixed cost or period cost remain unchanged in spite of changes in volume or activity.
Variable cost or product cost vary in complete proportion to the volume of output. Capital and revenue basis depends on the purpose of expenditure. Any cost incurred in purchasing assets either to earn income or increasing the earning capacity of the business is known as capital cost. But any cost incurred for the purpose of maintaining the earning capacity of the business it is revenue expenditure.
Q. Read the following statements - Assertion (A) and Reason (R)
Assertion (A): Revenue Expenditure is incurred for the purpose of increasing the earning capacity of the business.
Reason (R): Revenue expenditure can be easily defined as money spent for purchase or creating of long-term assets
Select the correct alternative from the following:
Direction: Read the following passage and answer the question that follows:
The slope of a total revenue curve is particularly important. It equals the change in the vertical axis (total revenue) divided by the change in the horizontal axis (quantity) between any two points. The slope measures the rate at which total revenue increases as output increases. We can think of it as the increase in total revenue associated with a 1-unit increase in output. The increase in total revenue from a 1-unit increase in quantity is marginal revenue. Thus marginal revenue (MR) equals the slope of the total revenue curve.
How much additional revenue does a radish producer gain from selling one more pound of radishes? The answer, of course, is the market price for 1 pound. Marginal revenue equals the market price. Because the market price is not affected by the output choice of a single firm, the marginal revenue the firm gains by producing one more unit is always the market price. The marginal revenue curve shows the relationship between marginal revenue and the quantity a firm produces. For a perfectly competitive firm, the marginal revenue curve is a horizontal line at the market price. If the market price of a pound of radishes is $0.40, then the marginal revenue is $0.40. Marginal revenue curves for prices of $0.20, $0.40, and $0.60. In perfect competition, a firm’s marginal revenue curve is a horizontal line at the market price.
Price also equals average revenue, which is total revenue divided by quantity. To obtain average revenue (AR), we divide total revenue by quantity, Q. Because total revenue equals price (P) times quantity (Q), dividing by quantity leaves us with price.
Q. The marginal revenue curve shows the relationship between ..................... and ......................
Direction: Read the following passage and answer the question that follows:
The slope of a total revenue curve is particularly important. It equals the change in the vertical axis (total revenue) divided by the change in the horizontal axis (quantity) between any two points. The slope measures the rate at which total revenue increases as output increases. We can think of it as the increase in total revenue associated with a 1-unit increase in output. The increase in total revenue from a 1-unit increase in quantity is marginal revenue. Thus marginal revenue (MR) equals the slope of the total revenue curve.
How much additional revenue does a radish producer gain from selling one more pound of radishes? The answer, of course, is the market price for 1 pound. Marginal revenue equals the market price. Because the market price is not affected by the output choice of a single firm, the marginal revenue the firm gains by producing one more unit is always the market price. The marginal revenue curve shows the relationship between marginal revenue and the quantity a firm produces. For a perfectly competitive firm, the marginal revenue curve is a horizontal line at the market price. If the market price of a pound of radishes is $0.40, then the marginal revenue is $0.40. Marginal revenue curves for prices of $0.20, $0.40, and $0.60. In perfect competition, a firm’s marginal revenue curve is a horizontal line at the market price.
Price also equals average revenue, which is total revenue divided by quantity. To obtain average revenue (AR), we divide total revenue by quantity, Q. Because total revenue equals price (P) times quantity (Q), dividing by quantity leaves us with price.
Q. The slope of the Total Revenue equals ……..
Direction: Read the following passage and answer the question that follows:
A producer (firm) is said to be in equilibrium when the firm is producing that quantity of output which gives the firm maximum profit.
For a firm, to be in equilibrium, two conditions must be fulfilled. First, and the necessary condition is that firm’s marginal cost equals marginal revenue.
Second, along with the first condition is that MC must be greater than MR beyond the level of output at which MC = MR. Therefore, fulfilment of the first condition alone does not ensure maximum profits. It is possible that MC = MR condition may be fulfilled at more than one output level but only that output level beyond which MC > MR is the maximum profits output level.
Q. What is the second condition for equilibrium?
Direction: Read the following passage and answer the question that follows:
A producer (firm) is said to be in equilibrium when the firm is producing that quantity of output which gives the firm maximum profit.
For a firm, to be in equilibrium, two conditions must be fulfilled. First, and the necessary condition is that firm’s marginal cost equals marginal revenue.
Second, along with the first condition is that MC must be greater than MR beyond the level of output at which MC = MR. Therefore, fulfilment of the first condition alone does not ensure maximum profits. It is possible that MC = MR condition may be fulfilled at more than one output level but only that output level beyond which MC > MR is the maximum profits output level.
Q. What is the first and necessary condition for equilibrium?
Direction: Read the following passage and answer the question that follows:
Law of Supply states that, other things being equal, quantity supplied increases with increase in price and decreases with decrease in price of a commodity.
Assumptions of Law of Supply : The Law of Supply assumes the following as constant:
(i) Price of all related goods
(ii) Prices of input factors of production
(iii) Technique of production
(iv) Goals of the producer
(v) Policies of the government
(vi) Expectations about the market
Exceptions to the Law of Supply:
Agricultural Produce: The supply of agricultural produce cannot be increased with increase in prices because of limitation of agricultural land and the time involved in producing a fresh crop. Also, it is more season dependent. On the other hand, most of the agricultural produce like fruits and vegetables is perishable in nature. This is why, their supply cannot be reduced with decrease in prices.
Supply of a Labour: The supply of labour is an exception to the law of supply. Initially, the supply of labour follows the law of supply, that is, with an increase in wage rate, there is an increase in supply of labour. But beyond a certain wage rate, the labour prefers to have some relaxed hours. The workers can maintain the same standard of living by working for fewer hours at higher wage rates. As a result, beyond that wage rate, the supply of labour starts falling. As a result, the supply curve of labour is backward bending.
Q. Which of the following is not the assumption of supply?
Direction: Read the following passage and answer the question that follows:
Agriculture provides livelihood to almost three fourth of population of India. Indian agriculture is highly dependent on spatial and temporal distribution of rainfall. Climate extremes such as drought and flood affect agriculture severely. An account of impact of climate extremes viz. drought and flood, on Indian food-grain production has been presented in this paper. There are temporal fluctuations in food grain production and area under the food-grain. In secular terms, both of them increased up to mid-eighties.
After mid-eighties there is decline in the area of food grain while maintaining an increase in production of food-grain suggesting the improvement in agricultural technology and policy. There is more temporal fluctuation in the production of food grain than the area under food grain. The analysis reveals that impact of drought on Indian agriculture is more than that of flood. Rabi food grain production depicts better adaptability to drought than Kharif food grain production mostly due to better access to irrigation infrastructure. Among the various food crops analysed all except jowar can effectively face flood events. Wheat and jowar perform relatively better during drought events.
Rice is most sensitive crop to the extreme climate events. Since rice is staple food in the sub-continent, management of rice productions against climate extremes needs special attention for food security and sustainability.
Q. What other things affect the supply of goods?
Direction: Read the following passage and answer the question that follows:
Agriculture provides livelihood to almost three fourth of population of India. Indian agriculture is highly dependent on spatial and temporal distribution of rainfall. Climate extremes such as drought and flood affect agriculture severely. An account of impact of climate extremes viz. drought and flood, on Indian food-grain production has been presented in this paper. There are temporal fluctuations in food grain production and area under the food-grain. In secular terms, both of them increased up to mid-eighties.
After mid-eighties there is decline in the area of food grain while maintaining an increase in production of food-grain suggesting the improvement in agricultural technology and policy. There is more temporal fluctuation in the production of food grain than the area under food grain. The analysis reveals that impact of drought on Indian agriculture is more than that of flood. Rabi food grain production depicts better adaptability to drought than Kharif food grain production mostly due to better access to irrigation infrastructure. Among the various food crops analysed all except jowar can effectively face flood events. Wheat and jowar perform relatively better during drought events.
Rice is most sensitive crop to the extreme climate events. Since rice is staple food in the sub-continent, management of rice productions against climate extremes needs special attention for food security and sustainability.
Q. What has caused the increase in the supply of food grains.
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