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WorksheetsCAFC CHP 3 UNIT 2 Theory of Cost
Total questions: 50
Worksheet time: 25mins
Which of the following cost curves is never 'U' shaped?
Average cost curve
Marginal cost curve
Average variable cost curve
Average fixed cost curve.
Total cost in the short run is classified into fixed costs and variable costs. Which one of the following is a variable cost?
Cost of raw materials.
Cost of equipment
Interest payment on past borrowings
Payment of rent on building
In the short run, when the output of a firm increases, its average fixed cost:
Increases
Decreases
remains constant
first declines and then rises
Which one of the following is also known as planning curve?
Long run average cost curve.
Short run average cost curve
Average variable cost curve
Average total cost curve
With which of the following is the concept of marginal cost closely related?
Variable cost.
Fixed cost
Opportunity cost
Economic cost
Which of the following statements is correct?
When the average cost is rising, the marginal cost must also be rising.
When the average cost is rising, the marginal cost must be falling.
When the average cost is rising, the marginal cost is above the average cost
When the average cost is falling, the marginal cost must be rising.
Which of the following is an example of “explicit cost”?
The wages a proprietor could have made by working as an employee of a large firm
The income that could have been earned in alternative uses by the resources owned by the firm
The payment of wages by the firm.
The normal profit earned by a firm.
Which of the following is an example of an “implicit cost”?
Interest that could have been earned on retained earnings used by the firm to finance expansion
The payment of rent by the firm for the building in which it is housed
The interest payment made by the firm for funds borrowed from a bank.
The payment of wages by the firm.
Marginal cost is defined as:
the change in total cost due to a one unit change in output.
total cost divided by output.
the change in output due to a one unit change in an input
total product divided by the quantity of input.
Which of the following is true of the relationship between the marginal cost function and the average cost function?
If MC is greater than ATC, then ATC is falling
The ATC curve intersects the MC curve at minimum MC
The MC curve intersects the ATC curve at minimum ATC
If MC is less than ATC, then ATC is increasing.
Which of the following statements is true of the relationship among the average cost functions?
ATC = AFC - AVC
AVC = AFC + ATC.
AFC = ATC + AVC
AFC = ATC - AVC
Which of the following is not a determinant of the firm's cost function?
The production function.
The price of labour.
Taxes
The price of the firm's output
Which of the following statements is correct concerning the relationships among the firm's cost functions?
TC = TFC - TVC.
TVC = TFC - TC
TFC = TC - TVC.
TC = TVC - TFC.
Suppose output increases in the short run. Total cost will:
increase due to an increase in fixed costs only
increase due to an increase in variable costs only.
increase due to an increase in both fixed and variable costs
decrease if the firm is in the region of diminishing returns
Which of the following statements concerning the long-run average cost curve is false?
It represents the least-cost input combination for producing each level of output.
It is derived from a series of short-run average cost curves.
The short-run cost curve at the minimum point of the long-run average cost curve represents the least-cost plant size for all levels of output
As output increases, the amount of capital employed by the firm increases along the curve.
The negatively-sloped (i.e. falling) part of the long-run average total cost curve is due to which of the following?
Diseconomies of scale
Diminishing returns
The difficulties encountered in coordinating the many activities of a large firm.
The increase in productivity that results from specialization
The positively sloped (i.e. rising) part of the long run average total cost curve is due to which of the following?
Diseconomies of scale.
Increasing returns
The firm being able to take advantage of large-scale production techniques as it expands its output.
The increase in productivity that results from specialization
A firm’s average total cost is Rs. 300 at 5 units of output and Rs. 320 at 6 units of output. The marginal cost of producing the 6th unit is:
Rs. 20
Rs. 120
Rs. 320
Rs. 420
A firm producing 7 units of output has an average total cost of Rs. 150 and has to pay Rs. 350 to its fixed factors of production whether it produces or not. How much of the average total cost is made up of variable costs?
Rs. 200
Rs. 50
Rs. 300
Rs. 100
A firm has a variable cost of Rs. 1000 at 5 units of output. If fixed costs are Rs. 400, what will be the average total cost at 5 units of output?
Rs. 280
Rs. 60
Rs. 120
Rs. 1,400
A firm’s average fixed cost is Rs. 20 at 6 units of output. What will it be at 4 units of output?
Rs. 60
Rs. 30
Rs. 40
Rs. 20
The efficient scale of production is the quantity of output that minimizes
average fixed cost.
average total cost.
average variable cost.
marginal cost.
When marginal costs are below average total costs,
average fixed costs are rising.
average total costs are falling
average total costs are rising.
average total costs are minimized.
A firm’s long-run average total cost curve is
Identical to its long-run marginal-cost curve.
Also its long-run supply curve because it explains the relationship between price and quantity supplied.
In fact, the average total cost curve of the optimal plant in the short run as it tries to produce at least cost.
Tangent to all the curves of short-run average total cost.
In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
an increase in pollution level
diseconomies of scale.
economies of scale.
constant returns to scale.
A firm’s long-run average total cost curve is
Identical to its long-run marginal-cost curve as all factors are variable.
Also its long-run total cost curve because it explains the relationship cost and quantity supplied in the long run
In fact, the average total cost curve of the optimal plant in the short run as it tries to produce at least cost.
Tangent to all short-run average total cost the curves and represents the lowest average total cost for producing each level of output.
The marginal cost for a firm of producing the 9th unit of output is Rs. 15. Average cost at the same level of output is Rs. 20. Which of the following must be true?
marginal cost and average cost are both falling
marginal cost and average cost are both rising
marginal cost is rising and average cost is falling
it is impossible to tell if either of the curves are rising or falling
Economic costs of production differ from accounting costs of production because
Economic costs include expenditures for hired resources while accounting costs do not
Accounting costs include opportunity costs which are deducted later to find paid out costs
Accounting costs include expenditures for hired resources while economic costs do not.
Economic costs add the opportunity cost of a firm which uses its own resources.
Which of the following statements is incorrect?
The LAC curve is also called the planning curve of a firm.
Total revenue = price per unit × number of units sold.
Opportunity cost is also called alternative cost.
If total revenue is divided by the number of units sold, we get marginal revenue.
Cost incurred which has ‘no relevance’ to future planning is called_
Marginal Cost
Sunk Cost
Book Cost
Average Cost
Which one of the following cost curve is rectangular hyperbola in shape?
TFC
MC
AFC
AVC
Which of the following is not a formula for marginal cost?
MCₙ = TCₙ – TCₙ₋₁
MC = Δ TC/Δ Q
MCₙ = TVCₙ – TVCₙ₋₁
MCₙ = TFCₙ – TFCₙ₋₁
Which of the following is incorrect formula?
TC = AC × Q
∑ MC = TC
∑ MC = TVC
∑ MC + TFC = TC
A firm encounters its “shutdown point” when:
average total cost equals price at the profit-maximizing level of output
average variable cost equals price at the profit-maximizing level of output
average fixed cost equals price at the profit-maximizing level of output
marginal cost equals price at the profit-maximizing level of output
Suppose that a sole proprietorship is earning total revenues of Rs.10,00,000 and is incurring explicit costs of Rs.7,50,000. The owner could work for another company for Rs.3,00,000 a year. What will be the implicit cost of the firm?
Rs. 3,00,000
Rs. 2,50,000
Rs. 7,50,000
Insufficient data
Suppose that a sole proprietorship is earning total revenues of Rs.10,00,000 and is incurring explicit costs of Rs.7,50,000. The owner could work for another company for Rs.3,00,000 a year. The above mentioned firm is earning:
Accounting profit of Rs. 2,50,000.
Economic loss of Rs. 50,000
Both a. and b. are correct.
None of the above is correct.
Suppose in the above mentioned question, the owner had invested Rs. 500,000 by withdrawing from his saving accounts on which he was earning 5% interest per annum, the economic profit or loss is
economic profit of Rs. 75,000
economic loss of Rs. 75,000
economic profit of Rs. 2,50,000
economic loss of Rs. 2,50,000
The LAC curve which envelops the family of SAC curve, is “U” shape because:
All SAC curves are U shaped
Law of variable proportions
Law of Return to scale
All of the above
Different department can be further sub divided into separate sections like sales can be split into separate sections such as for advertising, exports, and customer service is an example of:
Technical economies
Managerial economies
Commercial economies
Financial economies
When LAC Curve is declining, it will be tangent to the:
Falling portions of the SAC Curves
Rising portions of the SAC Curves
Both (a) and (b)
Neither (a) and (b)
Average Cost of Producing 50 units of a Commodity is 250 and variable cost is 10,000. What will be the average fixed cost of producing 100 units of the Commodity?
10
30
20
25
Fixed cost are a function of:
Output
Capacity
Time
They can never be changed
When LAC curve is _____, it will be tangent to the rising portions of the SAC curves.
Decreasing
Increasing
Constant
None of the above
When AC increases as a result of an increase in output:
MC = AC
MC > AC
MC < AC
None of the above
Beyond certain output level, when there is a sharp increase in Average Variable Cost (AVC), Average Cost (AC) also increases due to the reason that:
Fall in AFC is less than the sharp rise in AVC
Fall in AFC is greater than the sharp rise in AVC
Fall in AFC is equal to the rise in AVC
None of the above
Average Variable Cost Curve has a positive slope:
Up to normal capacity output
Beyond normal capacity output
At all levels of output
None of the above
Which of the following is an example of sunk cost?
Expenses incurred on advertising
Buy a new production facility
Replace worn out machinery
All of the above
Empirical evidence shows that the modern firms face ____ LAC
U-shaped
Boat shaped
L-shaped
Linear
_______ arises due to endogenous factors?
External economies
Internal economies
Both a. and b.
None of the above
Advertisement and other marketing expenditure will increase more proportionately. Which diseconomies is referred here?
Technical
Commercial
Financial
Managerial
