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Published on: 04/09/2019
Cost
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Questions + Answers key
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1.
What do the short run marginal cost, average variable cost and short run average cost curves look like?
2.
Can there be some fixed cost in the long run? If not, why?
3.
Briefly explain the concept of the cost function.
4.
What is the behaviour of average fixed cost as output increases?
5.
How does AFC behave as output is increased?
6.
Why is the short run marginal cost curve U-Shaped?
7.
What does the average fixed cost curve look like? Why does it look so?
8.
What are total fixed cost, total variable cost and total cost of a firm? How are they related?
9.
A firm's SMC schedule is shown in the following table. The total fixed cost of the firm is Rs. 100 Find the TVC, TC, AVC and SAC schedules of the firm.
| Q | SMC |
|---|---|
| 0 | - |
| 1 | 500 |
| 2 | 300 |
| 3 | 200 |
| 4 | 300 |
| 5 | 500 |
| 6 | 800 |
10.
The following table gives the total cost schedule of a firm. It Is also given that the average fixed cost at 4 units of output is Rs. 5. Find the TVC, TFC. AVC, AFC, SAC and SMC schedules of the firm for the corresponding values of output.
| Q | TC |
|---|---|
| 1 | 50 |
| 2 | 65 |
| 3 | 75 |
| 4 | 95 |
| 5 | 130 |
| 6 | 185 |
1.
( )
The Short run marginal cost, average variable cost and short run average cost curves are U-shaped because of Law of variable proportion.
2.
( )
No, there are no fixed costs in the long run as all the factors become variable. Fixed cost exists only in short run.
3.
( )
Cost function shows functional relationship between output and cost of production. It gives the least cost combination of inputs corresponding to different levels of output. Cost function is given as:
C = f(X), ceteris paribus, where,
C = Cost and
X = Output
4.
The shape of AFC is downward sloping Rectangular hyperbola. AFC falls as output increases because AFC=\(\frac{TFC}{Output}\) and TFC remains constant. So, as output increases, TFC remains constant, but AFC falls.
5.
The shape of AFC is downward sloping Rectangular hyperbola. AFC falls as output increases because AFC=\(\frac{TFC}{Output}\) and TFC remains constant. So, as output increases, TFC remains constant, but AFC falls.
6.
Marginal cost is U-shaped because of Law of variable proportion:
(i) As we know the shape of MC depends on the shape of TVC or TC. Let us suppose TVC.
(ii) Initially, TVC increases at a diminishing rate (Total Product increases at Increasing rate), which makes the gap of TVC, i.e. MC to fall.
(iii) Thereafter, TVC increases at an increasing rate( Total Product increases at diminishing rate) which makes the marginal cost to rise.
(iv) So, from inverse S-shape TVC curve, we derive U-shape MC curve.
7.
The shape of AFC is downward sloping Rectangular hyperbola. AFC falls as output increases because AFC=\(\frac{TFC}{Output}\) and TFC remains constant. So, as output increases, TFC remains constant, but AFC falls.
8.
(i) TC is divided into two parts TFC and TVC such that TC = TFC + TVC.
(ii) TFC is the overhead cost and it remains constant or fixed whatever be the level of output. TFC curve is a horizontal line parallel to the x-axis.
(iii) TVC is cost due to increased use of variable factors like raw material, labour, etc. TVC is inverse S-shaped starting from the origin due to law of variable proportion.
(iv) TC is aggregate of TFC and TVC. TC curve is inverse S-shaped starting from the level of fixed cost. The reason behind it shape is the law of variable proportion.
9.
| Q | SMC (given) |
TFC (given) |
TVC=\(\sum { MC } \) | TC=TFC+TVC | AVC= \(\frac{TVC}{Output}\) | SAC= \(\frac{TC}{Output}\) |
| 0 | - | 100 | 0 | 100 | - | - |
| 1 | 500 | 100 | 500 | 600 | 500 | 600 |
| 2 | 300 | 100 | 800 | 900 | 400 | 450 |
| 3 | 200 | 100 | 1000 | 1100 | 333.33 | 366.67 |
| 4 | 300 | 100 | 1300 | 1400 | 325 | 350 |
| 5 | 500 | 100 | 1800 | 1900 | 360 | 380 |
| 6 | 800 | 100 | 2600 | 2700 | 433.33 | 450 |
10.
| Q | TC (given) |
TFC |
AFC= \(\frac{TFC}{Output}\) | TVC = TC-TFC | AVC= \(\frac{TVC}{Output}\) | SAC= \(\frac{TC}{Output}\) | SMC=\(\frac{\Delta{TC}}{\Delta{Output}}\) OR \(\frac{\Delta{TVC}}{\Delta{Output}}\) |
|---|---|---|---|---|---|---|---|
| 1 | 5 | 20 | 2 | 30 | 30 | 50 | 30 |
| 2 |
65 |
20 | 10 | 45 | 22.5 | 32.5 | 15 |
| 3 | 75 | 20 | 6.67 | 55 | 18.33 | 25 | 10 |
| 4 | 95 | 20 | 5(given) | 75 | 18.75 | 23.75 | 20 |
| 5 | 130 | 20 | 4 | 110 | 22 | 26 | 35 |
| 6 | 185 | 20 | 3.33 | 165 | 27.5 | 30.83 | 55 |
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