Production and Costs  Important Questions for Class 12 Economics Concept of Cost Function

1.Cost It refers to the expenditure incurred by a producer on the factor as well as non-factor inputs for a given amount of output of a commodity.

2.Cost Function A cost function shows the functional relationship between output and cost of production. It is given as

C = F(Q)

Where, C – cost, F = function, Q = output

3.Implicit Cost These are the costs of self-owned and self-employed or self-supplied resources, e.g. rent of own land, interest on own capital, etc.

4.Explicit Cost These are those actual cash payments, which firms make to outsiders for their goods and services, e.g. wages, payment for raw material , rent, interest, etc.

5.Total Cost (TC) It is the sum total of fixed cost and variable cost, corresponding to a given level of output.

Symbolically, important-questions-for-class-12-economics-concept-of-cost-function-t-32-06.Total Fixed Cost (TFC) These costs are the sum total of expenditure incurred by the producer on purchase or hiring of fixed factors of production, e.g. rent of building, wages of the manager, etc.

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These costs do not vary with the output level.

7.Total Variable Cost (TVC) These are the costs which has been incurred for hiring variable factors of production like raw material, wages of casual workers etc. These costs vary with the quantity of output produced. These are also called prime cost. These costs changes directly with the level of output.

important-questions-for-class-12-economics-concept-of-cost-function-t-32-28.Average Cost (AC) It is the Total Cost per unit of output.

Symbolically, important-questions-for-class-12-economics-concept-of-cost-function-t-23-3

9.Average Fixed Cost (AFC) It is defined as the fixed cost of producing per unit of the  commodity. It is obtained by dividing TFC by the level of output.

important-questions-for-class-12-economics-concept-of-cost-function-t-23-4

10.Average Variable Cost (AVC) It is defind as the variable cost of producing per unit of the commodity. It is obtained by dividing TVC by the level of output

important-questions-for-class-12-economics-concept-of-cost-function-t-23-511.Marginal Cost It is ‘additional cost’ owing to the production of an additional unit of output.

Symbolically, important-questions-for-class-12-economics-concept-of-cost-function-12.Relationship between TC and MC

(i)TC increases at an increasing rate, when MC is increasing,

(ii)TC stops increasing at a diminishing rate, when MC reaches its lowest point.

(iii)TC increases at a diminishing rate, when MC is decreasing.

13.Relationship between AC and MC

(i)When Average Cost is falling, AC > MC.

(ii)When Average Cost is rising, AC < MC.

(iii)When Average Cost is constant and minimum AC = MC.

14.Relationship between MC and AVC

(i)Both Average Variable Cost and Marginal Cost starts from same point.

(ii)When Average Variable Cost is falling, AVC > MC.

(iii)When Average Variable Cost is rising, AVC < MC.

(iv)When Average Variable Cost is constant and minimum AVC = MC.

15.Relationship between AC, AVC and MC

(i)AC is the sum total of AVC and AFC, hence AC lies above AVC.

(ii)AVC and MC starts from same point.

(iii)When MC falls, both AC and AVC also falls but MC < AC and MC < AVC.

(iv)MC falls, reaches its minimum and start rising though AC and AVC continuous to falls till both reaches their minimum.

(v)MC is equal to AC and AVC at their respective minimum point.

(vi)With rise in output AC and AVC come close to each other but never coincide with each other as AFC is always positive.

16.Shapes of Cost Curves

(i)TC = Inverted ‘S’ shaped

(ii)TVC = Inverted ‘S* shaped

(iii)TFC = Horizontal line parallel to X-axis.

(iv)MC = ‘U’ shaped

(v)AC = ‘IF shaped

(vi)AVC = ‘U’ shaped

(vii)AFC = Rectangular hyperbola

Previous Years  Examination Questions

1.Give two examples of Variable Cost.  (Delhi 2013)

Ans. Two examples of Variable Cost are as follows:

(i) Cost of raw material.                                                                     (ii) Wages of casual labour.

2.Give an example each of Fixed Cost and Variable Cost. (Delhi 2013)

Ans. Examples for Fixed Cost and Variable Cost are:

(i)Fixed Cost Rent of the building.

(ii) Variable Cost Cost of raw material.

3.Define Marginal (Delhi 2013,2010c, 2008,2007,2006; All India 2009,2006)

Ans. Marginal Cost is ‘additional cost’ owing to the production of an additional unit of output.

Symbolically,                                                             MCnth = TCn-TCn_1

4.Give two examples of Fixed Cost. (Delhi 2013; All India 2010)

Ans. Two examples of Fixed Cost are:                                                                                   ‘ •                       ‘

(i) Expenditure on machine and plant. (ii) Wages and salaries of permanent staff.

5.What is the behaviour of Average Fixed Cost as output increases? (hots; Delhi 2012)

or

What is the behaviour of Average Fixed Cost as output is decreased?  (HOTS; AH India 2009)

or

How does Average Fixed Cost behave as output is increased?  (Delhi 2008C)

Ans. Average Fixed Cost goes on diminishing as output increases, but never become zero.

6.What is the behaviour of Total Variable Cost as output increases? (All India 2012)

Ans.Total Variable Cost increases with increase in output.

7.Define Fixed Cost.    (Delhi 2009,2008 C, 2007,2006; All India 2009,2006)

Ans. Fixed Costs are the sum total of expenditure incurred by the producer on the purchase or hiring of fixed factors of production.

8.Why is Average Total Cost greater than Average Variable Cost? (Alt India 2009)

Ans. Average Total Cost (ATC) is greater than Average Variable Cost (AVQ because Average Total Cost is the sum of Average Fixed Cost (AFC) and Average Variable Cost.

9. What does cost mean in economics?    (Delhi2008,2007)

Ans. Cost refers to the expenditure incurred by a producer on the factor as well as non-factor inputs for a given amount of output of a commodity

10. Define Variable Costs. (All India 2008; Delhi 2006)

Ans. Variable Costs are the costs incurred on hiring variable factors of production, these costs vary directly with the quantity of output produced. These are called prime cost also. Symbolically,  TVC = TC -TFC

 3 Marks Questions

11.State the relation between Total Cost and Marginal Cost. (Delhi 2014)

Ans. Relationship between Total Cost and Marginal Cost are:

(i) When MC is diminishing, TC increases at a diminishing rate.

(ii) When MC is rising, TC increases at an increasing rate.

(iii) When MC is constant, TC increases at a constant rate.

12.What is the behaviour of Average Fixed Cost as output is increased? Why is it so?  (Delhi 2014)

Ans. AFC falls, when output is increased. Since, the Total Fixed Cost remains the same with changes in output, therefore, AFC falls steadily with increase in output. AFC curve is downward sloping.

13.Complete the following table(Delhi 2013)
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14.Draw Average Variable Cost, Average Total Cost and Marginal Cost single diagram(Delhi 2012).

Ans. important-questions-for-class-12-economics-concept-of-cost-function-t-23-9

15.An individual is both the owner and the manager of a shop taken on rent. Identify  implicit cost and explicit cost from this information. Explain.(hots; Delhi 2012)

Ans. In the above example, rent Is an explicit cost as it is paid by the owner and salary is the implicit cost as it is earned by manager while working in an organisation.

Implicit cost These are costs of self-owned and self-employed or self supplied resources, e.g. rent of own land, interest on own capital, etc.

Explicit cost These are those cash payments, which firms make to outsider for their factor services, e.g. wages of labour, payment for raw material, rent, interest, etc.

16.A producer borrows money and opens a shop. The shop premises is owned by him. Identify implicit cost and explicit cost from this information. Explain, (hots; Delhi 2012)

Ans. In the above example, interest paid on borrowed money will be explicit cost whereas the imputed rent of the shop premises is implicit cost.

Implicit cost These are costs of self-owned and self-employed or self supplied resources, e.g. rent of own land, interest on own capital, etc.

Explicit cost These are those cash payments, which firms make to outsider for their factor services, e.g. wages of labour, payment for raw material, rent, interest, etc.

17.A producer invests his own savings in starting a business and employs a manager to look after it. Identify the implicit cost and explicit cost from this information. Explain. (HOTS; Delhi 2012)

Ans. In the above example, imputed values of the interest that a producer would have earned on his savings will be implicit cost and salary paid to the manager will be explicit cost.

Implicit cost These are costs of self-owned and self-employed or self supplied resources, e.g. rent of own land, interest on own capital, etc.

Explicit cost These are those cash payments, which firms make to outsider for their factor services, e.g. wages of labour, payment for raw material, rent, interest, etc.

18.Draw Total Variable Cost, Total Cost and Total Fixed Cost curves in a single diagram. (All India 2012)

Ans. important-questions-for-class-12-economics-concept-of-cost-function-t-23-10

19.A producer starts a business by investing his own savings and hiring the labour. Identify implicit cost and explicit cost from this information. Explain.(HOTS; All India 2012)

Ans. In the above example, imputed value of the interest that a producer would have earned on his savings will be implicit cost and wages paid to the labour will be the explicit cost.

Implicit cost These are costs of self-owned and self-employed or self supplied resources, e.g. rent of own land, interest on own capital, etc.

Explicit cost These are those cash payments, which firms make to outsider for their factor services, e.g. wages of labour, payment for raw material, rent, interest, etc.

20.A producer borrows money and starts a business. He himself looks after the business. Identify implicit cost and explicit cost from this information. Explain.(HOTS; All India 2012)

Ans. In the above example, interest paid on borrowed money will be explicit cost and income earned by him from his business is implicit cost.

Implicit cost These are costs of self-owned and self-employed or self supplied resources, e.g. rent of own land, interest on own capital, etc.

Explicit cost These are those cash payments, which firms make to outsider for their factor services, e.g. wages of labour, payment for raw material, rent, interest, etc.

21.Giving examples, explain the meaning of cost in economics. (Delhi 2011)

Ans. Cost refers to the expenditure incurred by a producer on the factor as well as non-factor inputs for production of a given amount of output of a commodity. It includes explicit cost (expenditure on the purchase of inputs from the market like wages paid to labours, interest paid on borrowed money, etc) and implicit cost (estimated expenditure on the use of self supplied factors like rent of the building owned by the producer, wages and salary for producer’s own labour, etc).

22.Distinguish between implicit and explicit costs and give examples. (All India 2011)

Ans.Difference between implicit cost and explicit cost

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23.Given below is the cost schedule of a firm. Its Average Fixed Cost is  20 when it  produces 3 units.    (Delhi 2010)

important-questions-for-class-12-economics-concept-of-cost-function-t-23-12important-questions-for-class-12-economics-concept-of-cost-function-t-32-13
24.A firm’s Average Fixed Cost, when it produces 2 units is ? 30. Its Average Total Cost schedule is given below. (All India 2010)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-11

25.Given below is the cost schedule of the firm. Its Total Fixed Cost is 120(All India 2010)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-12

26.From the following cost schedule of a firm, calculate Marginal Cost and Average Variable Cost at each level of output.(All India 2010)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-15

27.Explain the relationship between Marginal Cost and Average Cost.(All India 2008;Delhi 2007)

Ans. Relationship between Marginal Cost and Average Cost is as follows:

(i) When AC falls, MC is lower than AC.

(ii) When AC rises, MC is greater than AC.

(iii) When AC is constant and minimum (as at point £), MC is equal to AC.

(iv)MC’s minimum point (At Q) lies to the left of AC’s minimum point (At Q1)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-16

28.Why does the difference between Average Total Cost and Average Variable Cost decrease with increase in the level of output? Explain.(Delhi 2008 C)

Ans.As we increase the level of output, the difference between ATC and AVC decreases because ATC = AFC + AVC and Total Fixed Cost remain constant at all levels of output, but with rise in level of output, AFC decreases. That’s why  the difference between ATC and AVC decreases with rise in level of output.

important-questions-for-class-12-economics-concept-of-cost-function-t-32-17

4 Mark Questions

29.Define Marginal Cost. Explain its relation with Average Cost(All India 201l; Delhi 2009c)

Ans.  Marginal Cost is ‘additional cost’ owing to the production of an additional unit of output.

Symbolically,                                                             MCnth = TCn-TCn_1

 

Relationship between Marginal Cost and Average Cost

Relationship between Marginal Cost and Average Cost is as follows:

(i) When AC falls, MC is lower than AC.

(ii) When AC rises, MC is greater than AC.

(iii) When AC is constant and minimum (as at point £), MC is equal to AC.

(iv)MC’s minimum point (At Q) lies to the left of AC’s minimum point (At Q1)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-16

30.Define Variable Cost. Explain the behaviour of Total Variable Cost as output  increases.  (All India 2011)

Ans. Variable Cost      are the costs incurred on hiring variable factors of production, these costs vary directly with the quantity of output produced. These are called prime cost also. Symbolically,  TVC = TC -TFC

Total Variable Cost increases with increase in output. Initially, it increases at decreasing rate, eventually it increases at an increasing rate. In other words, it increases at an increasing rate when diminishing returns to a factor starts operating.

important-questions-for-class-12-economics-concept-of-cost-function-t-32-18
31.Complete the following table.(Delhi 2009)

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32.Complete the following table.(All India 2009)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-20

33.Draw Total Fixed Cost, Total Variable Cost and Total Cost Curves in a single diagram. State the relation between Total Variable Cost and Total Cost curves. (All India 2009)

Ans.important-questions-for-class-12-economics-concept-of-cost-function-t-23-10

Relations between Total Variable Cost and Total Cost curves are:

(i) TC is the sum of TFC and TVC.

(ii) TC always exceed TVC by the same amount of TFC.

(iiii) TVC and TC curves will run vertically parallel and vertical distance between the two is equal to TFC.

(iv) Both TC and TVC are inverted ‘S’ shaped. While TFC is horizontal line.

34.Complete the following table.(Delhi 2008)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-21

35.Complete the following table.(Delhi 2008)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-22

36.Distinguish between (i) Fixed Cost and Variable Cost giving examples (ii) Average Cost and Marginal Cost giving an example.  (All India 2008)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-23

37.Complete the following table.(All India 2008 c)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-24

important-questions-for-class-12-economics-concept-of-cost-function-t-32-25

 

38. Complete the following table.(All India 2008)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-30

39.Calculate Total Variable Cost and Total Cost from the following cost schedule of a firm whose Fixed Cost are  10.(Delhi 2007)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-1 (2)

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40.Calculate Total Variable Cost and Marginal Cost from the following cost schedule of a firm, whose Total Fixed Cost are  12(All India 2007)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-4

41.Complete the following table.(All India 2006)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-5

6 Mark Questions

42.From the following information about a firm, find the firms equilibrium output in terms of Marginal Cost and Marginal Revenue. Give reasons. Also, find profit at this output. (Delhi 2014)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-36

43.From the following information about a firm, find the firm’s equilibrium output in terms of Marginal Cost and Marginal Revenue. Give reasons. Also find profit at this output.  (All India 2014)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-37

According to the MR = MC approach, the firm attains its equilibrium, where the following two necessary and sufficient conditions are fulfilled.

(i) MR – MC

(ii)MC must be rising after the equilibrium level of output.

Thus, by looking at the above table, we can say that the firm is in equilibrium at output equal to 4 units, because at 4th unit of output MR = MC and MC increases after the 4th unit of output.

44.State giving reasons, whether the following statements are true or false.

(i)With increase in level of output, Average Fixed Cost goes on falling till reaches zero.(All India 2013)

(ii)Average Variable Cost falls even when Marginal Cost is rising. (Delhi 2010)

(iii)The difference between Total Cost and Total Variable Cost falls with increase in  output.(Delhi 2010)

(iv)As soon as Marginal Cost starts rising, Average Variable Cost also starts rising.(All India 2010)

(v)Average Cost falls only when Marginal Cost falls. (All India 2009)

(vi)The difference between Average Total Cost and Average Variable Cost is constant.(All India 200?)

(vii)As output is increased, the difference between Average Total Cost and Average

Variable Cost falls and ultimately becomes zero.    (All India 2009)

Ans. (i) False, because as output increases, Average Fixed Cost falls but can never be zero, Average Fixed Cost must remain positive even when it is falling, as TFC is always positive.

(ii) True, Average Variable Cost can fall even when Marginal Cost is rising, as MC cuts AVC at its minimum point.

(iii)False, because the difference between Total Cost and Total Variable Cost is equal to Total Fixed Cost which remains constant at all levels of output.

(iv)False, Average Variable Cost can fall even when Marginal Cost starts rising.

(v)False, Average Cost can fall even when Marginal Cost is rising as MC cuts AC at its minimum point.

(vi)False, the difference between Average Total Cost and Average Variable Cost is Average Fixed Cost which can never be constant. Since, AFC tends to decline with increase in output, the difference between ATC and AVC must reduce as output increases.

(vii)False, because as output increases, the difference between ATC and AVC falls but can never be zero. The difference is equal to AFC, which must remain positive, even when it is falling

45.Complete the following table.(Delhi 2011 c)

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46.Complete the following table.(All India 2011)

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important-questions-for-class-12-economics-concept-of-cost-function-t-32-41

47.Complete the following table. (All India 2011C)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-42

important-questions-for-class-12-economics-concept-of-cost-function-t-32-43

48.The Total Fixed Cost of a firm is  12. Given below is its marginal cost schedule. Calculate Total Cost and Average Variable Cost for each given level of output (Delhi 2006)

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49.Calculate Total Cost and Average Variable Cost of a firm at each given level of output from its cost schedule given below. (All India 2006)

important-questions-for-class-12-economics-concept-of-cost-function-t-32-45

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50.Explain the relation between Marginal Cost and Average Variable Cost with the  help of diagram.  (All India 2006)

Ans. Relations between Marginal Cost (MC) and Average Variable Cost (AVC) are as follows;

(i) MC and AVC starts from same point A.

(ii) AVC falls when MC remains below it. Hence, MC < AVC in this range of output (before pomt B in the figure)

(iii) When MC comes equal to AVC, the AVC becomes constant and this happens at its minimum point of AVC where MC curve cuts it from below Hence, MC = AVC (at point B),

(iv)In the range between L and K level of output, MC is rising but AVC diminishes.

(v)AVC starts rising when MC becomes higher than AVC. Hence, MC > AVC in this range of output (after point B).

(vi) Minimum of MC curve (at B) lies to the left of minimum point of AVC curve (at K)

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