MCQs on Cost Concepts, Meaning and Types of Cost
Learn the essential cost concepts in economics, including fixed, variable, and marginal costs, to understand how businesses optimize production and pricing decisions for profit maximization.
Muskan Verma15 Nov, 2024
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MCQs on Cost Concepts: Cost concepts are fundamental to understanding economics, especially when analyzing how firms make production decisions and set prices. For students preparing for CBSE Class 11 and 12 economics exams, understanding cost concepts and related Multiple Choice Questions (MCQs) is essential. In this blog, we'll discuss the key cost concepts and how to approach MCQs on these topics.
What is the Cost?
In economics, cost refers to the value of resources that are sacrificed to produce goods or services. These resources can be materials, labour, and capital, and the cost represents the monetary value spent on acquiring them. A firm incurs various costs depending on the level of production and the type of resources used. The primary goal for any business is to manage and minimize costs while maximizing output and profit. Costs are typically categorized into five main types: Fixed Costs (FC) : These are costs that do not change with the level of output. They are constant even when the firm is not producing any goods. Examples include rent, salaries, and insurance. Variable Costs (VC) : These costs change with the level of production. The more a firm produces, the higher its variable costs. Examples include raw materials, direct labor, and electricity usage. Total Cost (TC) : The sum of fixed costs and variable costs. Total cost includes all expenses incurred in production. Average Cost (AC) : The cost per unit of output, calculated by dividing total cost by the quantity of output. Marginal Cost (MC) : The additional cost incurred from producing one more unit of output.MCQs on Cost Concepts
Here are MCQs based on cost concepts, complete with answers and explanations:What is the total cost of production when fixed cost is ₹200 and variable cost is ₹300?
A) ₹500 B) ₹100 C) ₹300 D) ₹200 Answer : A) ₹500 Explanation : Total cost is the sum of fixed cost and variable cost. TC = FC + VC = ₹200 + ₹300 = ₹500.Which of the following is an example of fixed cost?
A) Wages of temporary workers B) Rent for factory space C) Raw materials D) Electricity bill Answer : B) Rent for factory space Explanation : Fixed costs do not change with production. Rent is a fixed cost as it remains constant regardless of output.If total variable cost increases by ₹100 and output increases by 50 units, what is the marginal cost?
A) ₹50 B) ₹100 C) ₹2 D) ₹200 Answer : A) ₹2 Explanation : Marginal cost is calculated by dividing the change in total variable cost by the change in output. MC = ΔTVC / ΔQ = ₹100 / 50 = ₹2.Which of the following is true about total cost?
A) Total cost includes only variable costs. B) Total cost includes both fixed and variable costs. C) Total cost does not include fixed costs. D) Total cost is equal to variable cost. Answer : B) Total cost includes both fixed and variable costs. Explanation : Total cost is the sum of fixed costs and variable costs, i.e., TC = FC + VC.When output increases, which cost tends to rise?
A) Marginal cost B) Average cost C) Total fixed cost D) Total cost Answer : D) Total cost Explanation : Total cost increases as output increases because both fixed and variable costs contribute to the total cost.If the total cost of producing 5 units is ₹200 and the total cost of producing 6 units is ₹220, what is the marginal cost of the 6th unit?
A) ₹40 B) ₹20 C) ₹30 D) ₹10 Answer : B) ₹20 Explanation : Marginal cost is the change in total cost divided by the change in output. MC = (₹220 - ₹200) / (6 - 5) = ₹20.In the short run, which cost is typically fixed?
A) Labor cost B) Raw material cost C) Rent D) Utility cost Answer : C) Rent Explanation : Rent is considered a fixed cost as it does not change with the level of output in the short run.What happens to marginal cost when production is increased in the short run?
A) It remains constant B) It decreases C) It increases D) It becomes zero Answer : C) It increases Explanation : In the short run, after a certain point, the marginal cost increases due to diminishing returns to the variable factors of production.The point at which marginal cost equals marginal revenue is known as:
A) Profit maximization point B) Break-even point C) Loss minimization point D) Cost reduction point Answer : A) Profit maximization point Explanation : Firms maximize profits when marginal cost (MC) equals marginal revenue (MR).What happens to total cost when fixed cost increases?
A) Total cost increases B) Total cost decreases C) Total cost remains the same D) Variable cost increases Answer : A) Total cost increases Explanation : An increase in fixed cost results in a higher total cost, while variable cost remains unaffected.Importance of Cost Concepts
Understanding cost concepts is crucial for several reasons:Pricing Decisions
Firms use cost concepts to determine the price at which they can sell their products to cover costs and generate a profit. Knowledge of costs helps businesses set prices that maximize profits while being competitive in the market.Profit Maximization
By analyzing marginal cost and marginal revenue, firms can determine the optimal level of output to maximize profit. This understanding helps businesses stay profitable and avoid losses.Efficiency
Knowledge of cost concepts aids in cost control and cost minimization, ensuring that businesses produce goods efficiently and avoid unnecessary expenditures.Investment Decisions
Firms assess costs to make informed investment decisions. By understanding which costs are fixed and which are variable, businesses can decide whether to invest in expansion, equipment, or labor.Break-even Analysis
Understanding costs is essential for performing break-even analysis, which helps firms know how much they need to sell to cover their costs and start making a profit. In summary, a thorough understanding of cost concepts is essential for businesses to make informed decisions about pricing, production, and profitability. For economics students, mastering these concepts is key to understanding how firms operate and make strategic decisions in a competitive market. Unlock your potential in commerce with PW Commerce Courses! Enroll today to gain in-depth knowledge and skills that will help you excel in your exams and future career. Don’t miss out!MCQs on Cost Concepts FAQs
What are fixed costs in economics?
Fixed costs remain constant regardless of the level of output produced, such as rent and salaries.
How do businesses use cost concepts for pricing?
Businesses use cost concepts to set prices that cover costs and maximize profits while staying competitive.
What is the difference between fixed and variable costs?
Fixed costs do not change with output, while variable costs increase with higher production levels.
Why is understanding cost important for businesses?
Understanding costs helps businesses make efficient production decisions, set prices, and maximize profits.
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