RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Rajasthan Board RBSE Class 12 Economics Chapter 8 Concept of Cost

RBSE Class 12 Economics Chapter 8 Practice Questions

RBSE Class 12 Economics Chapter 8 Multiple Choice Questions

Question 1.
Which costs are to be borne by society indirectly?
(a) Monetary Cost
(b) Average Cost
(c) Variable Cost
(d) Real costs
Answer:
(d)

Question 2.
Which curve is not U-shaped ?
(a) AC
(b) AFC
(c) MC
(d)AVC
Answer:
(b)

Question 3.
Those costs which are not included into accounts are known as:
(a) Monetary Costs
(b) Real Costs
(c) Explicit Costs
(d) Implicit Costs
Answer:
(d)

Question 4.
Which curve is also called Envelope Curve?
(a) SMC
(b) LAC
(c) SAC
(d) LMC
Answer:
(b)

Question 5.
If total cost is ₹ 200 and quantity of output is 20 units, then AC will be:
(a) 10
(b) 30
(c) 20
(d) 40
Answer:
(a)

RBSE Class 12 Economics Chapter 8 Very Short Answer Type Questions

Question 1.
With which factors are variable costs related in the economy?
Answer:
Raw material, fuel and power (electricity charges), wages for casual and temporary labour, transport costs, etc.

Question 2.
What are explicit Costs?
Answer:
The actual money expenditure which a firm must incur to make payments in production are called explicit costs. Example : Expenditure on Raw Material, labour, payment of interest etc.

Question 3.
What is cost?
Answer:
A firm has to incur expenses on inputs to obtain the outputs. This is known as cost in economics.

Question 4.
Write down the formula of Marginal Cost.
Answer:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Here, MC = Marginal Cost
∆ TC = Change in Total Cost
∆Q = Change in Output

Question 5.
Shape of which curve is a hyperbola?
Answer:
The shape of a fixed cost curve is a hyperbola, since the average fixed cost decreases with increasing scale of production.

Short Answer Type Questions

Question 1.
Give two examples of Variable Cost and Fixed Cost.
Answer:
Examples of fixed cost :

  1. Rent of building
  2. Depreciation of Machinery.

Examples of Variable cost :

  1. Expenses on Raw Material
  2. Labour Wages.

Question 2.
Differentiate between implicit and explicit costs.
Answer:

Implicit Cost Explicit Cost
1. Implicit costs are usually described as opportunity costs or the loss of an opportunity in a given time or situation. 1. Explicit costs are costs that occur and are reported in the business documents. They are also known as direct costs or accounting costs.
2. Implicit costs waive the potential benefits and satisfaction in a certain business transaction. Simply put, an implicit cost is the loss of a possible benefit or asset that did not occur. 2. An explicit cost is a cost that happens for a purpose. In addition i, explicit costs usually have a direct impact on the company and its profits.
3. Implicit costs deal with intangibles that usually leave without a trace or record. Implicit costs include: wasted potential opportunities, time, profit, and labour. 3. Explicit costs result in tangible assets or opportunities for the company. Examples of explicit costs are: payment for rent, salary and wages, services from other companies, raw materials, maintenance, bills, and other expenditures.
4. Implicit costs can also be said to be the indirect results of business activities and processes. Usually, they involve indirect expenses from unforeseen events or emergencies. 4. Explicit costs are easier to identify, recognize and account for because they leave a record or paper trail. In addition, explicit costs usually involve physical objects and money-based transactions.
5. Since implicit costs leave no records, these costs are not easy to account for. 5. Explicit costs are used by accountants in preparing business analysis and business-related documents like accounting, management and financial reports.

Question 3.
Write down the relationship between AC and MC.
Answer:

  1. MC and AC both can be calculated by TC.
  2. When AC falls, MC also falls but AC > MC.
  3. When AC rises, MC also rises but now MC > AC.
  4. When AC is minimum, then MC = AC.

In other words, MC curve cuts the AC curve at its minimum point (i.e. optimum point) and moves upwards.

Question 4.
What is opportunity cost?
Answer:
The concept of opportunity cost plays a very important role in modern economic analysis. Opportunity cost is the loss of income due to opportunity foregone. Opportunity cost is also called alternative or economic cost. It arises because of scarcity and alternative uses of resources. We know that the resources that are available, at any point of time, to a firm or any business organisation, are limited and resources have alternative uses. Therefore, profit maximizing firms have to choose the best from the alternatives available to them. In fact, firms have to forgo the gains expected from the second best alternative use of their resources. The foregone benefit is called opportunity cost of the gains from the chosen use of the resources.

Question 5.
Explain LAC (Long run average cost curve).
Ans.
Long-run average cost is the long-run total cost divided by the level of output. Long- run average cost curve depicts the least possible average cost for producing all possible levels of output. The short-run average cost curves are also called plant curves. In the long run, the firm has a choice in the employment of a plant, and it will employ that plant which yields minimum possible unit cost for producing a given output. Long-term average cost curve is in the shape of English letter ‘U’, because it is determined by return to scale. It is also called

the-envelope curve since it surrounds many short-term average cost curves LAC = \(\frac { TC }{ Q } \)

RBSE Class 12 Economics Chapter 8 Long Answer Type Questions

Question 1.
Discuss in detail the different concepts of cost.
Answer:
In order to produce goods, a firm uses raw material and factors of production (land, labour, capital, etc.) called ‘Inputs’. The expenditure incurred on these inputs is called cost of production. The functional relationship between cost and output is called Cost Function. Cost of production depends on the prices of factors of production. Higher level of output implies higher total cost of production, in a situation of constant technology and constant factor-prices. Cost can be classified into the following categories

(a) Social Cost- Social cost implies the cost which a society bears on account of production of a commodity. Social cost includes both private cost and external cost. It includes all those sacrifices and inconvenience that society has to bear in the process of production. For example, Mathura Oil Refinery discharges its waste into the Yamuna river causing water pollution causing danger to the beauty of Taj Mahal. Mills and factories located in a city cause air pollution by emitting smoke, etc.

(b) Monetary Cost- The amount spent in terms of money for the production of a commodity is called monetary cost. Suppose the cost of production of 500 T-Shirts is ₹ 2,00,000, then this amount will be called the monetary cost of producing 500 T- Shirts.

(c) Opportunity Cost- The concept of opportunity cost plays a very important role in modern economic analysis. Opportunity cost is the loss of income due to an opportunity foregone. Opportunity cost is also called as alternative or economic cost. It arises because of scarcity and alternative uses of resources. We know the resources that are available, at any point of time, to a firm or any business organisation, are limited and resources have alternative uses. Therefore, profit maximizing firms have to choose the best from the alternatives available to them. In fact, firms have to forego the gains expected from the second best alternative use of their resources. The foregone benefit is called opportunity cost of the gains from the chosen use of the resources.

(d) Real Cost – Real cost connotes to those payments which are made to the factors of production to compensate for the toil and efforts in rendering their services. According to Marshall, “The exertions of all the different kinds of labour that are directly or indirectly involved in making it, together with the abstinences or rather the waiting required, for saving the capital used in making it; all these sacrifices together will be called the real costs of production of the commodity.”

(e) Short-term Cost- Short-term is a period of time during which some factors are fixed and some are variable. Accordingly, short period costs are divided into two components,viz.

(a) Fixed Cost – Fixed costs are the sum total of expenditures incurred by the producer on the purchase or hiring of fixed factors of production.
(b) Variable Cost – Variable costs are the expenditures incurred by the producer on the use of variable factors of production.

(f) Long term cost – The long term is defined as a period of time which is sufficient to bring about proper changes in the scale of output through an adjustment of the quantity of the various factors employed. The quantity of all the factors can be increased or decreased according to the requirement of production. Thus, in the long run, all factors are variable.

(g) LAC (Long-term Average Cost or Envelope Curve) – Long-term average cost refers to the minimum possible per unit cost of producing different quantities of output in the long period. According to the Mansfield, “The long-run average cost curve is that curve which shows the minimum cost per unit of producing each output level corresponding to different scales of productivity.”

(i) LMC (Long-term Marginal Cost) – Change in the total cost in the long – term, due to the production of one more or one less unit of commodity is called long-term marginal cost. In the words of Ferguson, “Long-term Marginal Cost is the addition to total cost attributable to an additional unit of output when all inputs are optionally adjusted.”

(h) Explicit Cost – It is the cost which falls under the actual or business costs entered in the books of account. Explicit costs are the costs in terms of money expenditure of the factors of production hired or purchased by an entrepreneur. It would include wages paid to labour hired by the entrepreneur, interest paid on capital or rent paid on land. These costs are also called accounting costs.

(ii) Implicit Cost- Implicit costs are the value of the factors of production put in by the entrepreneur himself. It includes the normal returns on money- Capital invested by the entrepreneur, wages or salary for his services in his own firm, inputed rent if he is using his own land or building.

Question 2.
Find out the concepts of costs with formula for the following table:RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

RBSE Class 12 Economics Chapter 8 Other Important Questions – Answers

RBSE Class 12 Economics Chapter 8 Multiple-Choice Questions

Question 1.
Which of the following is considered as production in economics?
(a) Tilling of soil
(c) Preventing a child from falling into a manhole on the road
(b) Singing a song before friends
(d) Painting a picture for pleasure
Answer:
(a)

Question 2.
To economists, the main difference between the short-term and the long¬term is that:
(a) In the short-term, all inputs are fixed, while in the long-term, all inputs are variable.
(b) In the short-term, the firm varies all of its inputs to find the least cost combination of inputs.
(c) In the short-term, at least one of the firm’s input levels is fixed.
(d) In the long-term, the firm makes a constrained decision about how to use existing plant and equipment efficiently.
Answer:
(c)

Question 3.
Which cost increases continuously with the increase in production?
(a) Average Cost
(b) Marginal Cost
(c) Fixed Cost
(d) Variable Cost
Answer:
(d)

Question 4.
Which of the following cost curves is never ‘U’ shaped?
(a) Average Cost Curve
(b) Marginal Cost Curve
(c) Average Variable Cost Curve
(d) Average Fixed Cost Curve
Answer:
(d)

Question 5.
In the short run, when the output of a firm increases, its Average Fixed Cost:
(a) Increases
(b) Decreases
(c) Remains Constant
(d) First declines and then rises
Answer:
(b)

Question 6.
Which one of the following is also known as planning curve?
(a) Long-term average cost curve
(b) Short-term average cost curve
(c) Average variable cost curve
(d) Average total cost curve
Answer:
(a)

Question 7.
The cost of one thing in terms of the alternative given up is known as:
(a) Production cost
(b) Physical cost
(c) Real cost
(d) Opportunity cost
Answer:
(d)

Question 8.
With which of the following is the concept of Marginal Cost closely related?
(a) Variable Cost
(b) Fixed Cost
(c) Opportunity cost
(d) Economic Cost
Answer:
(a)

Question 9.
Which of the following statements is correct :
(a) When the Average Cost is rising, the Marginal Cost must also be rising.
(b) When the Average Cost is rising, the Marginal Cost must be falling.
(c) When the Average Cost is rising, the Marginal Cost is above the average cost.
(d) When the Average Cost is falling, the Marginal Cost must be rising.
Answer:
(c)

Question 10.
Which of the following is an example of an “Explicit cost” :
(a) The wages a properitor could have earned by working as an employee of a large firm.
(b) The income that could have been earned in alternative uses by the resources owned by the firm.
(c) The payment of wages by the firm.
(d) The normal profit earned by a firm.
Answer:
(c)

Question 11.
Which of the following is an example of an “Implicit cost”?
(a) Interest that could have been earned on retained earnings used by the firm to finance expansion.
(b) The payment of rent by the firm for the building in which it is housed.
(c) The interest payment made by the firm for funds borrowed from a bank.
(d) The payment of wages by the firm.
Answer:
(a)

Question 12.
A firm’s average total cost is ₹ 300 at 5 units of output and ₹ 320 at 6 units of output. The marginal cost of producing the 6th unit is:
(a) ₹ 20
(b) ₹ 120
(c) ₹ 320
(d) ₹ 420
Answer:
(d)

Question 13.
A firm producing 7 units of output has an Average Total Cost of ₹ 150 and has to pay ₹ 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?
(a) ₹ 200
(b) ₹ 50
(c) ₹ 300
(d) ₹ 100
Answer:
(d)

Question 14.
Identify the Fixed Cost from the following:
(a) Labour Cost
(b) Electricity bill
(c) Salary of watchman
(d) Cost of raw materials
Answer:
(c)

Question 15.
Which of the following is a Variable Cost in the short term?
(a) Rent of the factory
(b) Wages paid to the factory labour
(c) Interest payments on borrowed financial capital
(d) Payment on the lease for factory equipment
Answer:
(b)

Question 16.
The efficient scale of production is the quantity of output that minimizes:
(a) Average fixed cost
(b) Average total cost
(c) Average variable cost
(d) Marginal cost
Answer:
(b)

Question 17.
If Marginal Cost equals Average Total Cost :
(a) Average total cost is falling
(b) Average total cost is rising
(c) Average total cost in maximized
(d) Average total cost is minimized
Answer:
(d)

Question 18.
The change in the total production resulting from a change in a variable input is:
(a) Average cost
(b) Average production
(c) Marginal cost
(d) Marginal production
Answer:
(d)

Question 19.
When Marginal Costs are below Average Total Costs:
(a) Average Fixed costs are rising
(b) Average total costs are falling
(c) Average total costs are rising
(d) Average total costs are minimized
Answer:
(b)

Question 20.
If the Average Cost is falling, then:
(a) Marginal cost is rising
(b) Marginal cost is falling
(c) Marginal cost is equal to average
(d) It is impossible to tell if marginal cost is rising or falling
Answer:
(d)

Question 21.
The difference between Average Total Cost and Average Variable Cost:
(a) is constant
(b) is total fixed cost
(c) gets narrower as output decreases
(d) is the average fixed costs
Answer:
(d)

Question 22.
The average profit is equal to the difference between :
(a) AC and TC
(b) AC and VC
(c) AC and AR
(d) AC and TR
Answer:
(c)

Question 23.
Hyperbola is the shape of this curve :
(a)TFC
(b) AFC
(c) FC
(d) MC
Answer:
(b)

Question 24.
The vertical difference between TVC and TC is equal to :
(a) MC
(b) AVC
(c) TFC
(d) None of these
Answer:
(c)

Question 25.
All of the following are U shaped curves except the:
(a) AVC Curve
(b) AFC Curve
(c) AC Curve
(d) MC Curve
Answer:
(b)

RBSE Class 12 Economics Chapter 8 Very Short Answer Type Questions

Question 1.
What do you mean by accounting costs?
Answer:
Accounting costs are only related to those costs which include cash payments by the firm’s entrepreneur.

Question 2.
What do you understand by selling costs?
Answer:
Selling cost refers to the amount spent to promote sale of the commodity.

Question 3.
What is Production Cost?
Answer:
Production cost refer to the amount spent on the production of a commodity.

Question 4.
What is monetary Cost?
Answer:
The amount spent in terms of money for the production of commodity is called money cost.

Question 5.
What is Fixed Cost?
Answer:
Fixed cost refers to the expenditure incurred on the fixed factors of production. It does not change with change in output.

Question 6.
What is Variable Cost?
Answer:
Variable cost refers to the expenditure incurred on the variable factors of production. It varies with output.

Question 7.
What is Average Cost?
Answer:
According to Dooley, “The average cost of production is the total cost per unit of output”. In other words, average cost of production is the total cost of production divided by the total number of units produced.

Question 8.
State the formula to determine average cost.
Answer:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 9.
Define the shape of AC and MC curves.
Answer:
AC and MC curves are U-shaped.

Question 10.
If the total cost of producing 10 units of a commodity is ₹ 40 and that of producing 8 units is ₹ 30, what will be the marginal cost ?
Answer:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 11.
What do you understand by Explicit Cost?
Answer:
The actual expenditure which a firm must incur to make payments to the suppliers of resources, factors’ or services used for the production of a good is called explicit cost.

Question 12.
What is Implicit cost?
Answer:
The cost of self-owned factors which are employed by the entrepreneur in his own business is called implicit cost.

Question 13.
Why is Total Fixed Cost curve parallel to X-axis?
Answer:
Total fixed cost curve is parallel to X-axis because it signifies that the cost will remain fixed whatever be the volume of output.

Question 14.
Why are Total Cost curve and Variable Cost curve parallel to each other?
Answer:
Difference between total cost and variable cost is uniform and it is equivalent to fixed cost. That is why the distance between total cost curve and variable cost curve is uniform throughout their length. Therefore, TC and VC curves are parallel to each other.

Question 15.
In which cost the expenditure on raw material and wages of casual labourers will be included?
Answer:
Monetary Cost.

Question 16.
Why does fixed cost not influence marginal cost?
Answer:
Fixed cost does not influence marginal cost because this cost does not change with the change in volume of output. Whether the output is zero or maximum, fixed costs remain the same.

Question 17.
The cost of zero level of output is equal to which cost?
Answer:
Variable Cost.

Question 18.
What is Opportunity Cost?
Answer:
The opportunity cost of any good is the next best alternative good that is sacrificed.

Question 19.
What do you understand by Real Cost?
Answer:
Real cost connotes to those payments which are made to factors of production to compensate for the toil and efforts in rendering their services.

Question 20.
What is Break Even Point?
Answer:
It is the point, where Total Cost is equal to the Total Revenue.

Question 21.
What do you understand by Shut Down Point?
Answer:
It is a situation in which the price falls below Average Variable Cost and thus the firm is forced to stop production or shut down because the firm in this situation will not be able to recover its entire average cost.

Question 22.
Define Explicit Cost according to “Leftwitch”.
Answer:
According to Leftwitch, ” Explicit costs Eire those cash payments which firms make to outsiders for their services and goods.”

Question 23.
Define Implicit Cost according to “Leftwitch”.
Answer:
According to Leftwitch, “Implicit costs are costs of self-owned and self-employed resources.”

Question 24.
Define Opportunity Cost according to the “Richard Lipsey”.
Answer:
According to Richard Lipsey, ” The cost of using something in a particular venture is the benefit forgone (or opportunity cost) by not using it in its best alternative use.”

Question 25.
Write down the definition of Real Cost given by “Marshall”?
Answer:
In the words of Marshall, “The exertion of all different kinds of labour that are directly or indirectly involved in making it, together with the abstinences or rather the waiting required, for saving the capital used in making it; all these sacrifices together will be called the real costs of production of the commodity.”

Question 26.
Write down the definition of Average Cost given by “Dooley”?
Answer:
According to Dooley, “The Average Cost of production is the Total Cost per unit of output.”

Question 27.
Write down the definition of marginal cost given by “Ferguson”?
Answer:
According to Ferguson, “Marginal cost is the addition to total cost due to the addition of one unit of output.”

Question 28.
Write down the definition of Marginal Cost given by “Samuelson”?
Answer:
According to Samuelson, ” Marginal cost at any level of output is the extra cost for producing one extra unit more or less.”

Question 29.
Write down the definition of Long-term Average Cost Curve or Envelope Curve given by ‘Mansfield’ ?
Answer:
According to the Mansfield, “The long-term average cost curve is that curve which shows the minimum cost per unit of producing each output level corresponding to different scales of productivity.”

Question 30.
Define Long-term marginal cost according to Ferguson?
Answer:
According to Ferguson, “Long-term marginal cost is the addition to total cost attributable to an additional unit of output when all inputs are optionally adjusted.”

RBSE Class 12 Economics Chapter 8 Short Answer Type Questions

Question 1.
Differentiate between Fixed Costs and Variable Costs.
Answer:

Basis of Difference Fixed Costs Variable Costs
1. Transformation Fixed costs do not change with change in quantity of output. Variable costs change with change in quantity of output.
2. Period It is a long period concept. It is a short period concept.
3. Situation of zero Fixed costs remain the same whether output is zero or maximum. Variable cost as zero when output is zero. These costs increase when output increases and decrease when output decreases.
4. Factors It is related to the fixed factors. It is related to the variable factors.
5. Continuance A firm can continue production even if there is loss of fixed costs. Production will be continued by a firm, only if its variable costs are recovered.
6. Examples Rent, wages of permanent staff, license fee, cost of plant and machinery, etc. Cost of raw material, wages of casual labour, expenses on electricity, etc.

Question 2.
Write a comment on the quote “Opportunity Costs Means Opportunity Lost”.
Answer:
In real life, we go from one job to another and from one business to another. We lose the current job salary for a second job. So remuneration lost is termed as opportunity cost. Suppose a person working as a clerk for ₹ 2,000/- per month is to be appointed as a supervisor. Other things being equal, the person is to be offered higher than ₹ 2,000/- for the job of a supervisor. But at the same time, he is to sacrifice his old job of ₹ 2,000/- per month. This sacrifice of? 2,000/- is his opportunity cost of working as supervisor. Thus, opportunity cost is the opportunity lost or opportunity foregone in terms of the next best alternative use of a factor.

Question 3.
Show AC, AVC, AFC and MC in one diagram.
Answer:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 4.
How is short period marginal cost estimated?
Answer:
Short Period Marginal Cost can be estimated either from Total Variable Cost or from Total Cost. Marginal cost is an additional cost. MC can be calculated by the following ways :
MC = TCn – TCn-1
= (TFCn + TVCn) – (TFCn-1 + TVCn-1)
= TVCn – TVCn-1
(TFCn = TFCn-1, because TFC is constant).

Question 5.
Explain the relation between marginal cost and average cost.
Ans.
Relation between Marginal Cost and Average Cost
(a) MC and AC both can be calculated by TC.
(b) When AC falls, MC also falls but AC > MC.
(c) When AC rises, MC also rises, but now MC > AC.
(d) When AC is minimum, then MC = AC.
In other words, MC curve cuts the AC curve at its minimum point (i.e. optimum point) and goes upwards.

Question 6.
Why are AVC, ATC and MC curves U-shaped?
Answer:
It is due to the Law of Variable Proportions. Law of variable proportions (diminishing returns) states that as the units of variable factor are increased, MP first rises and then falls. When MP rises, MC falls and when MP falls, MC rises. It is the behaviour of MC, which determines the behaviour of AC.

When MP is maximum then MC is minimum and when AP is maximum then AC is minimum. Under Ilnd stage, MC and AC both rises.

Question 7.
What are the limitations of the concept of opportunity cost?
Answer:
The concept of opportunity cost is not free from the following limitations:

  1. The doctrine cannot be applied to those factors which are specific and which have no alternative uses. The transfer cost of such factors is zero.
  2. The theory is based on the assumption of perfect competition, which is not found in reality.
  3. There may be difference between individual and social costs. A smoke emithing , factory in the heart of the town may involve large sacrifice or alternatives in the form of hazards to health which cannot be measured in monetary terms.
  4. The foregone alternatives are often not clearly ascertainable due to modern complex production system.
  5. If factors are prevented from moving then their prices do not reflect opportunity cost.

Question 8.
Define Average Cost and Marginal Cost.
Answer:
Average Cost – According to Dooley, ” The average cost of production is the total cost per unit of output. “In other words, average cost of production is the total cost of production divided by the total number of units produced. Suppose, the total cost of production of 600 units is ₹ 1,200, the average cost will be :
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Marginal Cost – According to Ferguson, “Marginal cost is the addition to total cost due to the addition of one unit of output.”
Suppose, total cost of 6 units is ₹ 120 and total cost of 8 units is ₹ 180.
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 9.
Illustrate the concept of Variable Cost with the help of a table and diagram.
Answer:
Variable costs are those which are incurred on the use of variable factors. When the output changes, these costs also change. As the production increases, these costs also increase and as the production decreases these costs also fall. When the output is zero, then this cost is also zero. These costs are called Prime Costs or Direct Costs. Variable costs are explained with the help of given table:

Units of Output Variable Cost (₹)
0 0
1 10
2 18
3 24
4 28
5 32
6 38

The above Table shows that as the output goes on increasing, the variable cost also goes on increasing. When output is zero, the variable cost is also zero. When output is one unit, the variable cost is ₹ 10, and when it reaches six units, the variable cost is ₹ 38.

Question 10.
Why is short-term average cost curve U-shaped?
Answer:
In the short-term, average cost curves are U-shaped. The U-shape average cost curve implies that the average cost curve falls in the early stages and it then moves up beyond a certain point. It can be on account of the following reasons:

(a) Basis of Average Fixed Cost and Average Variable Cost : Average cost is the aggregate of Average Fixed Cost and Average Variable Cost. With every increase in the output, the average fixed cost and average variable cost falls. But after a minimum value, average variable cost stops falling, but not the average cost. The point, where AC is minimum, is called the optimum point. Therefore, it is only due to the nature of AFC and AVC that AC first falls, reaches minimum and afterwards starts rising upward and hence assumes the U-shape.

(b) Basis of the Law of Variable Proportion : The U-shape of the short-run average cost curve can also be explained in terms of the law of variable proportion. This law states that when the quantity of a variable factor is changed, then the Total Production increases while determining the quantity of other components, but after some time, it starts decreasing. In this phase, the AC output of the firm is increasing because it is operating under the law of rising returns due to various internal economies. Thus, the ‘U’ size of short-run average cost reduction is due to non-proportional returns on the given scale of the plant.

Question 11.
Explain the relationship between Average and Marginal Cost curves.
Answer:
The relationship between Marginal Cost and Average Cost is the same as that between any other marginal-average quantities. When marginal cost is less than average cost, average cost falls and when marginal cost is greater than average cost, average cost rises. This marginal-average relationship is a matter of mathematical truism and can be easily understood by a simple example. Suppose a producer produces a commodity at an average cost of ₹ 30. If cost of producing the next one unit is ₹ 10, his average cost falls to ₹ 20, Now, if he produces one unit more and his average cost falls, it means that the additional unit must have cost him less than ₹ 20

Now, if he produces one unit more and his average cost rises, it means that the additional unit raises his average cost, and then the marginal unit must have cost him more than ₹ 20. Finally, if as a result of the production of an additional unit, the average cost remains the same, the marginal unit must have cost him exactly ₹ 20. That is, marginal cost and average cost would be equal in this case.

Question 12.
Explain the concept of cost function. How is the long period average cost curve obtained?
Answer:
The functional relationship between cost and output is called cost function. A cost function studies the functional relationship between cost and output. It spells out least cost combinations of inputs corresponding to different levels of output. For a producer, the costs corresponding to different levels of output can be expressed like this :
C = f (Q)
Here, C = Cost of production
Q = Quantum of output.

Question 13.
Distinguish between the Accounting Costs and non-accounting Costs.
Answer:
Accounting costs relate to those costs only which involve cash payments by the entrepreneur of the firm. Accounting costs are also called explicit costs. Costs of factors owned by the entrepreneur himself and employed in his own business are called implicit costs. Implicit costs are also known as non-accounting costs. For example:

  1. Rent of self-owned building
  2. Interest of self-owned capital
  3. Wages of entrepreneur

Thus, economic costs include both accounting costs and non-accounting or implicit costs.
Economic Cost = Accounting Cost (Explicit Cost) + Non-Accounting Cost (Implicit Cost)
Economic Profit = Total Revenue-Economic Cost Accounting Profit = Total Revenue – Explicit Cost
Total Revenue – Accounting Cost = Accounting Profit – Non Accounting Cost = Economic Profits. Accounting Profits are always greater than Economic Profits.

Question 14.
Differentiate between Opportunity cost and Real cost.
Answer:
The opportunity cost of any good is the next best alternative good that is sacrificed. That is to say, the opportunity cost of producing a good is not any other alternative good that could be produced with the same factors; it is only the most valuable other good which the same factors could produce. The factors which are used for the manufacture of a car may also be used for the production of an equipment for the army. Therefore, the opportunity cost of the production of a car is the output of the army equipment foregone or sacrificed, which could have been produced with the same amount of factors that have gone into the making of a car.

Real cost connotes to those payments which are made to factors of production to compensate for the toil and efforts in rendering their services. Real cost is computed in terms of the pain and the discomfort involved for labour when it is engaged in production, and also the abstinence and sacrifice involoved in saving and capital accumulation.

According to Marshall, “The exertions of all the different kinds of labour that are directly or indirectly involved in making it, together with the abstinences sacrifices together will be called the real costs of production of the commodity.”

Question 15.
What is the utility of LAC Curve?
Answer:
The utility of LAC curve lies in its ability to assist the firm in the determination of the best size of the plant to be adopted for producing the given output. For outputs less than the low-cost combination at the optimum scale, that is, when the firm is operating subject to increasing returns to scale, it is more economical to underuse a slightly larger plant operating at less than its minimum cost output than to overuse a smaller plant. Conversely, at outputs beyond the optimum level, that is, when the firm experiences decreasing returns to scale, it is more economical to overuse a slightly smaller plant than to underuse a slightly larger one.

Question 16.
What is Long-run Average Cost Curve or Envelope Curve?
Answer:
Long-run average cost refers to the minimum possible per unit cost of producing different quantities of output in the long period.

According to Mansfield, ” The long-run average cost curve is that curve which shows the minimum cost per unit of producing each output level corresponding to different scales of productivity.” It is determined by dividing long-run Total Cost by the quantity of output produced. It is the lowest average cost attainable when all inputs are variable; that is, when any plant size can be constructed.

Question 17.
How does LAC curve’s U-shape depend upon returns to scale? Explain.
Answer:
LAC curve is a ‘U’ shape curve. This shape of LAC depends upon the returns to the scale. Returns to scale may be increasing, constant or decreasing. We can express it as follows:

Returns to Scale LAC Internal & External
Increasing returns to scale Constant returns to scale Decreasing returns to scale LAC decreases
LAC is minimum
LAC increases

Economies rise here.
Economies are set off by diseconomies.
Diseconomies rise here.

The traditional shape of LAC is ‘U’ shaped but in modem technology, the LAC will be ‘L’ shaped because after getting economies of scale, a firm will always try to minimize the cost and in this way curve will be perfectly flat.

Question 18.
Why is the shape of Average Fixed Cost curve a hyperbola ?
Answer:
The shape of Average Fixed Cost curve is a hyperbola. This is proved by the following facts :

(a) As output increases, AFC goes on decreasing. This is why, AFC curve is a downward sloping curve.
(b) The Average Fixed Cost curve slope should go down to touch the horizontal axis. But this will not happen because AFC cannot be zero. Thus, it is clear that the Average Fixed Cost is decreasing due to the increase in production. The Average Fixed Cost curve is a hyperbola. At different points, the total area below the curve will be the same.

RBSE Class 12 Economics Chapter 8 Essay Type Questions

Question 1.
What is Total cost, Average cost and Marginal cost? Explain the relationship between Average cost and Marginal cost.
Answer:
(i) Total CostTotal cost can be known by aggregating fixed cost and variable cost. With increase in output, total cost is also increasing. It includes both total fixed cost and total variable cost. It may also be called as total cost of production and expressed like this –
TC = TFC + TVC
TC curve can be obtained by adding vertically the TFC curve and TVC curve.

(ii) Average Cost The Average Cost is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q). By per unit cost of production, we mean that all the fixed and variable costs are taken into the consideration for calculating the average cost. Thus, it is also called as Per Unit Total Cost. Short run average cost (SAC) is the per unit cost of production of a commodity in the short run. It can be expressed like this –
SAC = TC/Q = Total Cost/Total Output

(iii) Marginal CostMarginal cost is the addition to the Total Cost caused by producing one more unit of output. In other words, marginal cost is the addition to the total cost of producing n units instead of n-1 units (i.e.one less) where n is any given number. It can be expressed as –
MC = TCn – TCn-1
Since marginal cost is a change in total cost as a result of a unit change in output, it can also be written as :
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Where ∆TC represents a change in total cost and ∆Q represents a unit change in output or total product.

Relation between Average Cost and Marginal Cost
(i) Both AC and MC are calculated from TC : Average cost can be worked out by dividing the total cost by total output.
AC = TC/Q
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Likewise, marginal cost can also be calculated from total cost. The addition made to the total cost by producing one more unit of the commodity is called marginal cost.
MC = TCn – TCn-1

(ii) When AC falls, MC also falls : When average cost falls, marginal cost also falls. In this case, marginal cost falls more rapidly than the average cost. That is why when marginal cost curve is falling, it is below the average cost curve.

(iii) When AC rises, MC is also rising : When average cost rises, marginal cost also rises but marginal cost rises more rapidly than the average cost.

(iv) MC cuts AC at its lowest point : When average cost is minimum then marginal cost will be equal to it.

(v) For a brief stretch, AC may continue to decline even when MC is rising : Shows that between points F and E, marginal cost is rising while AC continues to fall.

(vi) Mutual Interaction between MC and AC : When marginal cost is more than average cost, average cost has a tendency to rise. It seems as if marginal cost curve is pulling the AC curve upward. On the other hand, when MC is less than AC, it pulls the AC curve downward. When MC is equal to AC then the latter is constant.

Question 2.
Why are short period AC and MC curves U-shaped?
Answer:
Short-term Average Cost curve is U-shaped. This means that first, this curve decreases, and after reaching the minimum point, it starts moving upwards. It explains the definition of variable proportion. The law of variable ratio states that initially (unless fixed factor residue remains) the variable factor MP (marginal product) increases. And, finally (fixed factor and variable factor after reaching their ideal ratio or optimal ratio), the MP of variable factor increases.

Let the variable factor L (labour) and fixed factor be the capital. When the MPL rises, it means L. Increasing output means higher growth in AP than every additional unit of increasing MP. It is seen from a different angle, this means that the requirement of L per unit of production decreases (in case of rising return for one factor). Ultimately it means that the cost of the variable unit (L) of the output starts to fall. Or, that AVC is a habit of falling, actually the opposite situation is decreasing when the operation is decreasing. Thus, AVC takes U-shape AC = AVC + AFC. AFC only falls in the form of increase in production and its components (in TC) gradually decrease with the increase in production.

Thus, initially falling AFC combines with falling AVC to cause falling AC. Subsequently, AFC tends to be very very small, so that, while it is falling, it no longer obstructs the pace of rising AC (owing to rising AVC) to any meaningful extent. Hence, the final conclusion is that AC along with AVC tends to be U-shaped in accordance with the law of variable proportions.

RBSE Class 12 Economics Chapter 8 Numerical Questions

Question 1.
Find out Total Cost and Marginal Cost on the basis of the following table:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 2.
From the following data, calculate Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 3.
Calculate Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost and Marginal Cost if :
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 4.
Calculate fixed and variable cost from the following table
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Total Cost = TFC + TVC
Or 13,000 = TFC + 1,000 × 10
Or 13,000 = TFC + 10,000
Or TFC = 13,000 – 10,000
Or TFC = 3,000

Question 5.
From the following data find out Total Fixed Cost, Total Average Fixed Costs, Average Variable Cost, Average Total Cost and Marginal Cost :
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost

Question 6.
Calculate the fixed and variable costs from the following figures:
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
Solution:
Total Incremental Cost = 7,940 – 5,375 = ₹ 2,565
Incremental output = 1,810 – 784 = 1,026 units
RBSE Solutions for Class 12 Economics Chapter 8 Concept of Cost
= 2565/1026 = ₹ 2.50
Total cost for 1,810 units = ₹ 7,940
Variable Cost for 1,810 unit = 1,810 × 2.50
= ₹ 4,525
Fixed Cost = TC – VC
= 7,940 – 4,525
= ₹ 3,415
Answer:
Fixed cost = ₹ 3,415 and Variable Cost = ₹ 2.50 per unit.

RBSE Solutions for Class 12 Economics