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Economics Theory of Cost MCQ
1. Which of the following is an example of an “explicit cost”?
(a) The wages a proprietor could have made by working else where
(b) The income that could have been earned in alternative uses by the resources owned by the firm
(c) The payment of wages by the firm
(d) None of these.
Explicit cost is the payment made to the external factors of production. Hence the payment of wages by the firm is an explicit cost. So, option (c) is correct.
2. Which of the following is an example of an “implicit cost”?
(a) Interest that could have been earned on retained earnings used by the firm to finance expansion
(b) The payment of rent by the firm for the building in which it is housed
(c) The interest payment made by the firm for funds borrowed from a Co- operative bank.
(d) The payment of salary by the firm
Implicit cost is the cost of self supplied factors of production. Hence Interest that could have been earned on retained earnings used by the firm to finance expansion is implicit cost. So, option (a) is correct.
3. A promoter running his business takes out Rs.30,000 per year as his salary from the total receipts of his firm. The implicit cost of this promoter.
(a) less than 15,000
(b) more than 10,000
(c) Rs.30,000 a year
(d) Zero
An promoter running his business takes out Rs.30,000 per year as his salary from the total receipts of his firm. The implicit cost of this promoter Rs.30,000 a year. So, option (c) is correct.
4. Which of the following costs is not recorded in the books of accounts?
(a) Explicit costs
(b) Manufacturing costs
(c) Actual costs
(d) Implicit costs.
Implicit costs are not recorded in the books of accounts because no actual money is spent against implicit cost. So, option (d) is correct.
5. The cost that involves actual payment to other parties is called
(a) Implicit costs
(b) Explicit costs
(c) Economic costs
(d) Opportunity costs.
Payments made to outsiders is called explicit cost. So, option (b) is correct.
6. All payments paid to factors of production and opportunity cost is called
(a) Implicit costs
(b) Explicit costs
(c) Economic costs
(d) Hidden costs.
Economic costs are incurred by a firm to pay the factor owners for purchase or hire of services of factor inputs. So, option (c) is correct.
7. Alternative costs are called
(a) opportunity cost
(b) fixed cost
(c) social cost
(d) external cost
Alternative costs are called opportunity cost. So, option (a) is correct.
8. Shut-down point for a firm is a situation where its
(a) average revenue = average cost
(b) average revenue > average cost
(c) average revenue = average variable cost
(d) average revenue > average variable cost
Shut down point is a position when firms average revenue equals to average variable cost (i.e. if firm tries to continue to produce the firm, cannot not meet its variable cost per unit). So, option (c) is correct.
9. Which cost must be paid even if the firm’s level of output is zero.
(a) Variable
(b) Indirect
(c) Semivariable
(d) Fixed.
Firms have to pay fixed costs even if firms stop production. So, option (d) is correct.
10. Which of the following is not a fixed cost?
(a) Payment of interest on debt capital.
(b) Charges for fuel and electricity
(c) Depreciation charges on plant & machinery.
(d) Contractual rent for equipment or buildings.
Payment of interest on debt capital, depreciation charges on plant & machinery, contractual rent for building are expenses fixed in nature. Even if firm stop production firm cannot avoid those expenses.
But charges for fuel and electricity is variable expenses because if firm stop production, firm can avoid such expenses. So, option (b) is correct.
11. Cost incurred on factors which neither increase or decrease is known as
(a) Fixed cost
(b) Variable cost
(c) Direct cost
(d) All of these.
Fixed cost neither increases or decreases. So, option (a) is correct.
12. The cost function indicates the functional relationship between total cost and ——-.
(a) Total raw materials
(b) Semi variable cost
(c) Total output
(d) Variable cost.
Cost function shows the relationship between total cost and total output. So, option (c) is correct.
13. In the short run, if the firm cannot cover its total variable cost ———.
(a) It continues its operations
(b) It shuts down its operations temporarily
(c) It shuts down its operations forever
(d) None of these.
In the short run, if firm cannot cover its total variable cost, it would shut down the operation temporarily because firm always try to meet marginal cost of production. So, option (b) is correct.
14. The sum of total fixed cost and total variable cost is known as
(a) marginal cost
(b) variable cost
(c) total cost
(d) all of above.
The sum of total fixed cost and total variable cost is known as total cost. So, option (c) is correct.
15. Which of the following is correct regarding the shape of total fixed cost curve (TFC)?
(a) Rectangular hyperbola
(b) Bell-shaped
(c) Inverted L-shaped
(d) Straight line parallel to horizontal axis
Total fixed cost curve is a straight line parallel to horizontal axis because with change in output there is no change in total fixed cost. So, option (d) is correct.
16. Which of the following cost curves is never ‘U’ shaped?
(a) Average cost curve
(b) Marginal cost curve
(c) Total cost curve
(d) Fixed cost curve
Average cost curve, marginal cost curve, Total cost curve may be U shaped. But Fixed cost curve is not U shaped. So, option (d) is correct.
17. If there is no production in the short run, TC will be :
(a) zero
(b) positive
(c) negative
(d) All of these.
If there is no production in short run, firm has to bear fixed cost. So, under short run, in spite of no production total cost (TC) will be positive.So, option (d) is correct.
18. The Average Fixed Costs curve of a firm
(a) Is parallel to the X axis
(b) Is parallel to the vertical axis
(c) Is a ‘L’ shaped curve
(d) Is a downward slopping curve from left to right.
The average fixed cost curve of a form is a downward slopping from left to right, because with increase in output, average fixed cost reduces. So, option (d) is correct.
19. To maximise profits which of the following conditions must be satisfied
(a) MR < MC < TC
(b) MR = MC
(c) MR > MC > TC
(d) All of these.
Firm reaches equilibrium point when MR = MC. Firm achieves maximum profit at its equilibrium point. So, option (b) is correct.
20. For maximizing profit in the short run which condition should be satisfied
(a) AR = AC = TC
(b) MR = MC
(c) MR = AR = TR
(d) MC = AC > TC
In short run, firm earns maximum profit when marginal revenue equals to marginal cost.
21. The conditions of long-run equilibrium for a firm operating under perfect competition are
(a) AR = MR = AC
(b) AR = MC = AC
(c) AR = MC = MR
(d) AR = MR = MC.
Firm attains equilibrium point under long run when AR = MR = MC. So, option (d) is correct.
22. When average cost falls, marginal cost is less than ————-.
(a) Overhead cost
(b) Direct cost
(c) Fixed cost
(d) Average cost.
Marginal cost have a relationship with average cost. When average cost is falling , marginal cost (MC) is less than the average cost. When average cost is rising, marginal cost is greater than the average cost.So, option (d) is correct.
23. Total average cost (TAC) is equal to
(a) TC – TFC
(b) TFC/Q + TVC/Q
(c) AVC – AFC
(d) None of the above
Total average cost (TAC) is equal to AFC (Average Fixed Cost) + AVC (Average Variable Cost), i.e TFC (Total Fixed Cost) /Q (quantity) + TVC (Total Variable Cost) /Q (quantity). So, option (b) is correct.
24. A firm’s average fixed cost is Rs.40 at 12 units. What will be the average fixed cost at 8 units:
(a) Rs.60
(b) Rs.65
(c) Rs.85
(d) Rs.75
Total Fixed Cost = 40 x 12 = Rs.480. Average fixed cost at output level 8 units = 480/8 = Rs.60. So, option (a) is correct.
25. When shape of average cost curve is upward, marginal cost:
(a) Must be falling
(b) Must be constant
(c) Must be increasing
(d) Any of these
When average cost curve is upward moving, marginal cost must also be rising. So, option (c) is correct.
26. Which one of the following curves is NOT U-shaped?
(a) The AVC curve
(b) The AFC curve
(c) The AC curve
(d) The MC curve.
The average cost curve (AC curve), average variable cost curve (AVC curve), Marginal cost curve (MC curve) all these three curve are U shaped. With increase in output, these curve first start decreasing and then after a certain point these costs start increasing. So, these curves are U shaped. But average fixed cost decreases with increase in output. So average fixed cost curve is downward sloping. So, option (b) is correct.
27. The average variable cost is the difference of
(a) AVC and TC
(b) AFC and MC
(c) ATC and AFC
(d) AFC and TC
Average variable cost = Average total cost – Average fixed cost. So, option (c) is correct.
28. As output increases it diminishes the
(a) MR
(b) ATC
(c) AFC
(d) TC.
Output increase results in decrease in average fixed cost. So, option (c) is correct.
29. The AFC will decrease due to an
(a) Increase in output
(b) Decrease in output
(c) Increase in total cost
(d) All of these.
Average fixed cost reduces with increase in output due to spread of same fixed cost among more units. So, option (a) is correct.
30. As output increases, average fixed cost:
(a) Remains constant
(b) Starts declining
(c) Start increasing
(d) None
As total fixed cost is fixed increase in output results in falling, average fixed cost because total fixed cost is being spread among more units. So, option (b) is correct.
31. Average fixed cost can be obtained through:
(a) AFC = TFC / TS
(b) AFC = EC / TU
(c) AFC = TC / PC
(d) AFC = TFC / TU
Average fixed cost = Total fixed cost / Total output units. So, option (d) is correct.
32. AFC curve is :
(a) Convex & downward sloping
(b) Concave & downward sloping
(c) Convex to origin
(d) Concave to origin
AFC curve is convex and downward sloping. So, option (a) is correct.
33. Breakeven point for a firm occurs where
(a) Total revenue>total cost
(b) Total revenue<total cost
(c) Total revenue = total cost
(d) All of the above.
Break Even point is no profit no loss position i.e. when total revenue = total cost.So, option (c) is correct.
34. The LAC is an envelope of-
(a) average long run marginal cost
(b) short run total cost
(c) short run average cost
(d) all of these.
Long run average cost curve is an envelope of a few short run average cost curve. So, option (c) is correct.
35. A publisher to publish a book on engineering. His fixed cost is Rs.2,00,000. If he sells the book at Rs.350 per unit and incurs a variable cost of Rs.150 per unit, the break-even revenue for the firm in ————.
(a) Rs.1,75,000
(b) Rs.3,00,000
(c) Rs.3,50,000
(d) Rs.2,40,000.
Break Even Quantity = [Fixed cost / (Selling price per unit – Variable cost per unit)]
= [2,00,000 / (350 – 150)] = 2,00,000/200 = 1,000 units
Break Even Revenue = 1,000 x 350 = Rs.3,50,000. So, option (c) is correct.
36. Country have comparative advantage over another country only if
(a) When a country can produce more than the other country
(b) When a country can produce at lower opportunity cost than the other country
(c) When a country can produce a sufficient amount of goods by itself
(d) None of these.
A country enjoys comparative advantage over another country when it can produce at lower opportunity cost than the other country (known as International trade comparative cost theory). So, option (b) is correct.
37. Social cost is equal to
(a) private cost + hidden cost
(b) money cost + implicit cost
(c) private cost + external cost
(d) implicit cost + accounting cost.
Social cost = Private cost + external cost. So, option (c) is correct.
38. Marginal cost curve can intersect AC curve at its
(a) Highest level
(b) Lowest level
(c) minimum point
(d) anywhere.
When average cost (AC) is minimum, marginal cost is equal to average cost. So, marginal cost curve can intersect AC curve at its minimum point. So, option (c) is correct.
39. When AC is at its minimum, then
(a) AC > MC > TC
(b) AC < MC
(c) AC = MC
(d) None of the above.
When AC is minimum, MC curve meet AC curve so, then AC = MC. So, option (c) is correct.
40. The minimum point of AC curve, is tangent to
(a) MR
(b) MC
(c) AR
(d) TC
The minimum point of AC curve, is tangent to MC. So, option (b) is correct.
41. Average Profit is difference between
(a) AC and AR
(b) AR and MR
(c) AC and MR
(d) TC and TR
Average profit = Average Revenue – Average Cost. So, option (a) is correct.
42. ________ is rectangular hyperbola shaped
(a) TFC
(b) AFC
(c) MC
(d) TC.
Average fixed cost curve is rectangular hyperbola shaped. So, option (b) is correct.
43. A firm’s average fixed cost is Rs.20 at 6 units of output. what will it be at 4 units of output?
(a) Rs.70
(b) Rs.30
(c) Rs.50
(d) Rs.15
Total fixed cost = 20 x 6 = Rs.120. Average fixed cost at output level 4 = 120/4 = 30. So, option (b) is correct.
44. If total cost at 10 units is Rs.600 and Rs.640 for 11th unit. The marginal cost of 11th unit is:
(a) Rs.10
(b) Rs.60
(c) Rs.40
(d) Rs.70
Total cost at 10 units = Rs.600. Total cost at 11 units = Rs.640. Marginal cost for 11th unit = 640 – 600 = 40. So, option (c) is correct.
45. Assume the total cost of production of commodity Y is Rs.1,25,000. Out of this cost implicit cost is Rs.35,000 and normal profit is Rs.25,000. what will be the explicit cost of commodity Y?
(a) 45,000
(b) 65,000
(c) 55,000
(d) 95,000
Total cost of production = Explicit cost + Implicit cost + Normal profit.
Explicit cost of commodity Y = 1,25,000 – (35,000 + 25,000) = 65,000. So, option (b) is correct.
46. What is the total cost of production of 20 units, if fixed cost is Rs.5,000 and variable cost is Rs.2?
(a) 4040
(b) 5040
(c) 6040
(d) 5020
Total cost of production = 20 x 2 + 5,000 = 40 + 5,000 = 5,040. So, option (b) is correct.
47. At which point does the marginal cost curve intersect the average variable cost curve and short run average total cost curve?
(a) At equilibrium points
(b) At their lowest points
(c) At their upward points
(d) Topmost point
At their lowest point, MC curve, AVC curve and short run ATC curve intersect. So, option (b) is correct.
48. A firm’s average fixed cost is Rs.20 at 6 units of output. what will it be at 3 units of output?
(a) Rs.60
(b) Rs.35
(c) Rs.40
(d) Rs.25
Total fixed cost = 20 x 6 = Rs.120. Average fixed cost at output level 3 units = 120/3 = Rs.40 . So, option (c) is correct.
