Part – B
Answer the following questions in one or two sentences
Question 21.
Define cost.
Answer:
Cost refers to the total expenses incurred in the production
of a commodity.
Question 23.
What do you mean by fixed cost?
Answer:
Fixed cost does not change with the change in the quantity of
output. The expenses on fixed factors remain unchanged irrespective of the
level of output and these expenses are called fixed cost.
Question 24.
Define Revenue?
Answer:
The amount of money that a producer receives in exchange for
the sale of goods is known as revenue. In short, revenue means sales revenue.
It is the amount received by a firm from the sale of a given quantity of a
commodity at the prevailing price in the market.
Question 25.
Explicit Cost – Define.
Answer:
Explicit cost refers to the actual expenditures of the firm
to purchase or hire the inputs.
Question 26.
Give the definition for ‘Real Cost’?
Answer:
Real Cost refers to the payment made to compensate for the
efforts and sacrifices of all factor owners for their services in production.
Real Cost includes the efforts and sacrifices of landlords in the use of land,
capitalists to save and invest, and workers in foregoing leisure. Real costs
are considered pains and sacrifices of labour as the real cost of production.
Question 27.
What is meant by Sunk cost?
Answer:
A cost incurred in the past and cannot be recovered in the
future is called a sunk cost.
Part – C
Answer the following questions in One Paragraph
Question 28.
Distinguish between fixed cost and variable cost.
Answer:
Fixed Cost:
Does not change with the change in the quantity of output.
It is also called as ‘Supplementary cost’ or ‘Overhead
cost’.
(Eg.) Rent of the factory, Permanent worker’s salary.
Variable Cost:
These costs vary with the level of output
It is also called as ‘Prime cost’, ‘Special cost’ or ‘Direct
cost’.
(Eg.) Cost of raw materials, Temporary worker’s salary.
Question 29.
State the differences between money cost and real cost.
Answer:
Money Cost:
It is the total money expenses incurred by a firm in
producing a commodity.
It includes the cost of raw materials, payments of wages and
salaries, rent, interest, etc.,
It is also called as prime cost or direct cost or nominal
cost.
Real Cost:
It refers to the payment made to compensate for the efforts
and sacrifices of all factor owners for their services in production.
It includes the efforts and sacrifices of factors of
production.
Landlord’s effort is the use of land, capitalists to save
and invest and workers in foregoing leisure.
Question 30.
Distinguish between explicit cost and implicit cost.
Answer:
Explicit Cost:
Payment made to others for the purchase of factors of
production.
It includes wages, payment for raw material, rent, interest,
expenditure on transport and advertisement.
It is also called as accounting cost or out of pocket cost
or money cost.
Implicit Cost:
Payment made to the use of resources that the firm already
owns.
Cash payment is not made for the use of producer’s own land,
building, machinery and other factors of production.
Implicit cost is also called as imputed cost or book cost.
Question 31.
Define opportunity cost and provide an example?
Answer:
Opportunity cost refers to the cost of the next best
alternative use. In other words, it is the value of the next best alternative
foregone.
For example, a farmer can cultivate both paddy and sugarcane
in farmland.
If he cultivates paddy, the opportunity cost of paddy output
is the amount of sugarcane output given up.
Opportunity Cost is also called as “Alternative Cost” or
Transfer cost.
Question 32.
Stale the relationship between AC and MC.
Answer:
There is a unique relationship between the AC and MC curves.
When AC is falling, MC lies below AC.
When AC becomes constant, MC also becomes equal to it.
When AC starts increasing, MC lies above the AC.
MC curve always cuts AC at its minimum point from below.
Question 33.
Write a short note on Marginal Revenue?
Answer:
Marginal Revenue [MR] is the addition to the total revenue
by the sale of an additional unit of a commodity.
MR can be found out by dividing change in total revenue by
the change in quantity sold out.
MR = ∆TR/∆Q where MR denotes Marginal Revenue, ∆TR denotes
change in Total Revenue and ∆Q denotes change in total quantity.
The other method of estimating MR is:
MR = TRn – TRn-1, (or) TRn+1 – TRn
Where, MR denotes Marginal Revenue,
TRn denotes total revenue of nth item,
TRn-1 denotes Total Revenue of n – 1th item and
TRn+1 denotes Total Revenue of n + 1th item.
If TR = PQ,
MR = dTR/dQ = P, which is equal to AR.
Question 34.
Discuss the Long run cost curves with a suitable diagram.
Answer:
In the long run all factors of production become variable. The
existing size of the firm can be increased. There are neither fixed inputs nor
fixed costs in the long run.
LAC = LTC/Q
LAC – Long-run average cost LTC – Long-run total cost
Q – Denotes the quantity of output.
The LAC curve is derived from short run average cost curves.
It is the locus of points denoting the least cost curve of producing the
corresponding output.
The LAC curve is called as ‘Planning curve’ or ‘Envelope
curve’
Part – D
Answer the following questions in about a page
Question 35.
If total cost =10+Q3, find out AC, AVC, TFC, AFC when Q = 5.
Answer:
TC = 10 + Q3
AC = TCQ
AC = 10+Q3Q
If Q=5, Q = 5 × 5 × 5 = 125
AC = 10+1255 = 1355 = 27
AVC:
TC = 10 + Q3
TC = TFC + TVC
TVC = Q3
AVC = TVCQ
= Q3Q=Q2
If Q = 5, then AVC = 52
AVC = 25
TFC:
TC = 10 + Q3
TC = TFC + TVC
TFC = 10
AFC:
AFC = TFCQ
= 105
AFC = 2
Question 36.
Discuss the short run cost curves with suitable diagram:
Answer:
1. TFC - Total Fixed Cost Curve
2. TVC - Total Variable Cost Curve
3. TC - Total Cost Curve
4. AFC - Average Fixed Cost Curve
5. AVC - Average Variable Cost Curve
6. AC OR ATC - Average Cost or Average Total Cost
7. MC - Marginal Cost
1. Total fixed cost: TFC
All payments for the fixed factors of production are known
as total fixed cost. It does not change with output.
2. Total variable cost: TVC
All payments to the variable factors of production is called
as total variable cost. As output increases TVC also increases.
3. Total cost curves: TC
Total cost means the sum total of all payments made in the
production. It is the total cost of production.
TC = TFC + TVC.
4. Average fixed cost: AFC
It refers to the fixed cost per unit of output.
AFC = TFCQ
5. Average variable cost: AVC
It refers to the total variable cost per unit of output.
AVC = TFCQ
6. Average cost:
It refers to the total cost per unit of output.
AC = TCQ (or) AC = AFC + AVC
ATC curve is also a ‘U’ shaped curve.
Initially ATC declines, reaches a minimum and rises beyond
the optimum output.
The ‘U’ shape of the AC reflects the law of the variable
proportions.
Marginal Cost:
Marginal cost is the additional made to the total cost by
producer one extra unit of output
MCn = TCn – TCn-1
Question 37.
Bring out the relationship between AR and MR curves under various
price conditions.
Answer:
Average Revenue: Average revenue is the revenue per unit of
the commodity sold. It is calculated by dividing the total revenue by the
number of units sold.
AR = TR / Q
Marginal Revenue Marginal Revenue is the addition made to
the total revenue by selling one more unit of a commodity.
MRn = TRn – TRn-1
Declining AR and MR: (at declining price)
Explanation:
If a firm is able to sell additional units at the same price
then AR and MR will be constant. If the firm sells its additional units only by
reducing the price then both AR and MR will fall and be different.
Constant AR and MR:
(at fixed price)
If price remains constant, MR also remain constant and
coincide with AR. Under perfect competition as the price is constant, AR is
equal to MR and their shape will be straight line horizontal to X axis.
TR – AR – MR – Constant price
When a firm sells large quantities at lower prices both AR
and MR will fall. But the fall in MR will be steeper than the fall in the AR
and MR lies below AR.
The MR curve divides the distance between AR curve and Y axis into two equal parts. The decline in AR need not be a straight line or linear. If the prices are declining with the increase in quantity sold, the AR can be non-linear may be concave or convex to the origin.