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Published on: 16/12/2019
Cost
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1.
Can AC and AVC curves touch each other?
2.
Why is average total cost greater than average variable cost?
3.
What do the short run marginal cost, average variable cost and short run average cost curves look like?
4.
Can there be some fixed cost in the long run? If not, why?
5.
Briefly explain the concept of the cost function.
6.
Can MC increase when AC falls?
7.
A farmer takes a farm on rent and carries on farming with the help of his family members. Identify explicit and implicit costs from this information. Explain.
8.
Distinguish between variable cost and fixed cost. Give two examples of each.
9.
At which point does the SMC curve cut the SAC curve? Give reason in support of your answer.
10.
Why does SMC curve cut AVC curve at the minimum point of AVC curve?
11.
Suppose that a firm's TFC is Rs.100 and MC schedule of the firm is the following:
| Output(Units) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| MC(Rs.) | 10 | 20 | 30 | 40 | 50 | 60 | 70 |
(i) Is the MC curve U-shaped?
(ii) Derive AVC schedule. Will the AVC curve be U-shaped? Discuss why or why not?
12.
Complete the following table if AFC of one unit of production is Rs. 60.
| Output | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
|---|---|---|---|---|---|---|---|---|
| TC | 90 | 105 | 115 | 120 | 135 | 160 | 200 | 260 |
| TVC | ||||||||
| TFC | ||||||||
| AVC | ||||||||
| AFC | ||||||||
| ATC | ||||||||
| MC |
13.
The total fixed cost of a firm is Rs.12. Given below is its marginal cost schedule. Calculate total cost and average variable cost for each given level of output.
| Output | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Marginal Cost(Rs.) | 9 | 7 | 2 | 4 | 8 | 12 |
14.
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 |
15.
If marginal cost equals to average total cost,
average total cost is falling
average total cost is rising
average total cost is maximized
average total cost is minimized
16.
Which one of the following elements 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.
17.
Which one of the following statements is true to the relationship among the average cost functions?
ATC = AFC - AVC.
AVC = AFC + ATC.
AFC = ATC + AVC
AFC = ATC - AVC
18.
Which one of the following statements 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.
19.
Which one of the following cost curves is never 'U' shaped?
Average cost curve.
Marginal cost curve.
Average variable cost curve.
Average fixed cost curve.
1.
( )
No, because difference between AC and AVC is AFC and AFC can never be zero.
2.
( )
Because AC is sum total of AFC and AVC.
3.
( )
The Short run marginal cost, average variable cost and short run average cost curves are U-shaped because of Law of variable proportion.
4.
( )
No, there are no fixed costs in the long run as all the factors become variable. Fixed cost exists only in short run.
5.
( )
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
6.
Yes, it can happen when MC is below, than AC at the time of MC increases. The reason is that MC is confined to only one unit of the commodity produced whereas AC is related to all the units of commodity produced. As a result when MC increase, in case of MC, the whole increase is confined to the concerned one unit but in case of AC, this increase is shared by all the units of commodity produced. As the result of, rising MC is unable to bring about an increase in AC.
7.
(i) For producing a commodity, a firm requires factor inputs (like services of land, labour, capital etc.) and non-factor inputs (like raw material, electricity, fuel etc.).
(ii) Actual money spent by a firm on buying and hiring of factor and nonfactor inputs is called explicit cost. As per question, a farmer takes a farm on rent. So, the rent he pays to landloard is the explicit cost.
(iii) Implicit cost is the imputed or estimated value of inputs supplied by the owner of the firm himself. As per question, if a farmer carries on farming with the help of family members, even then the imputed wages will be an implicit cost.
8.
| Total Variable Costs | Basis | Total Fixed Costs |
|---|---|---|
| The cost incurred on variable factors of production is known as TVC. | Meaning | Fixed cost are those costs of production that do not change with a change in output. |
| It can be changed in the short run. | Changed | It cannot be changed in the short run. |
| It is zero when there is no production | Cost at zero output | It can never be zero even if there is no production. |
| It is incurred on variable factors like labour, raw material etc. | Factors of Production | It is incurred on fixed factors like land, buildings etc. |
| TVC is inversely S-shaped as variable cost initially increases at a diminishing, and then increases at an increasing rate. | Shape of the curve | TFC is a straight line parallel to the X-axis as fixed cost remains the same at all levels of output. |
| Wages of casual labour, payment for raw material, etc. | Example | Salary of permanent staff, insurance premium, building rent, etc. |
9.
(i) It happens because when SAC falls, SMC is less than SAC.
(ii) When SAC starts rising, SMC is more than SAC.
(iii) So, it is only when SAC is constant and at its minimum point, that SMC is equal to SAC. Therefore, SMC curve cuts SAC curve at its minimum point.
10.
(i) It happens because when AVC falls, SMC is less than AVC.
(ii) When AVC starts rising, SMC is more than AVC.
(iii) So, it is only when AVC is constant and at its minimum point, that SMC is equal to AVC. Therefore, SMC curve cuts AVC curve at its minimum point.
11.
(i) MC curve is not U-shaped.
(ii)
| Output (Units) | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| TFC (Given) | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
| MC (Given) | 10 | 20 | 30 | 40 | 50 | 60 | 70 |
| TVC=\(\sum\)MC | 10 | 30 | 60 | 100 | 150 | 210 | 280 |
| AVC=\(\frac{TVC}{Output}\) | 10 | 15 | 20 | 25 | 30 | 35 | 40 |
AVC curve will not be U-shaped because AVC data does not show operation of law of variable proportion.
12.
| Output | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
|---|---|---|---|---|---|---|---|---|
| TFC (Given) | 60 | 60 | 60 | 60 | 60 | 60 | 60 | 60 |
| TC (given) | 90 | 105 | 115 | 120 | 135 | 160 | 200 | 260 |
| TVC = TC - TFC | 30 | 45 | 55 | 60 | 75 | 100 | 140 | 200 |
| AVC=\(\frac{TVC}{Output}\) | 30 | 22.5 | 18.3 | 15 | 15 | 16.7 | 20 | 25 |
| AFC=\(\frac{TFC}{Output}\) | 60 | 30 | 20 | 15 | 12 | 10 | 8.6 | 7.5 |
| ATC=\(\frac{TC}{Output}\) | 90 | 52.5 | 38.3 | 30 | 27 | 26.7 | 28.6 | 32.5 |
| MC=\(\frac{\Delta{TC}}{\Delta{Output}}\) or \(\frac{\Delta{TVC}}{\Delta{Output}}\) | 30 | 15 | 10 | 5 | 15 | 25 | 40 | 60 |
13.
| Output | MC (Given) | TVC = \(\sum\)MC | TFC | TC = TFC + TVC | AVC\(\frac{TVC}{Output}\) |
|---|---|---|---|---|---|
| 1 | 9 | 9 | 12 | 21 | 9 |
| 2 | 7 | 16 | 12 | 28 | 8 |
| 3 | 2 | 18 | 12 | 30 | 6 |
| 4 | 4 | 22 | 12 | 34 | 5.5 |
| 5 | 8 | 30 | 12 | 42 | 6 |
| 6 | 12 | 42 | 12 | 54 | 7 |
14.
| 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 |
15.
(d)
average total cost is minimized
16.
(d)
The price of the firm's output.
17.
(d)
AFC = ATC - AVC
18.
(a)
Interest that could have been earned on retained earnings used by the firm to finance expansion.
19.
(d)
Average fixed cost curve.
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