Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 5th Lesson Cost and Revenue Analysis Class 11 Textbook Exercise Questions and Answers.
Cost and Revenue Analysis Class 11 Questions and Answers AP Inter 1st Year Economics 5th Lesson
I. Multiple Choice Questions (1 Mark)
Question 1.
The costs of self-owned & self-employed resources are termed as:
(1) Accounting cost
(2) Explicit cost
(3) Money cost
(4) Implicit cost
Ans.
(4) Implicit cost
Question 2.
Find the total cost, when TFC = Rs. 200/- and TVC = Rs. 225/- ?
(1) Rs. 200/-
(2) Rs. 225/-
(3) Rs. 425/-
(4) Rs. 25/-
Ans.
(3) Rs. 425/
Question 3.
If the total cost at 5 units of output is Rs. 500/- and at 7 units, it is Rs. 700/-. Find the marginal cost at 7th unit (In Rs.) ?
(1) 400
(2) 300
(3) 200
(4) 100
Answer:
(4) 100
Question 4.
The Total Cost (TC) at zero (0) units of output is:
(1) Equal to zero
(2) Equal to total fixed cost
(3) Equal to total variable cost
(4) Equal to marginal cost
Answer:
(2) Equal to total fixed cost
Question 5.
The minimum point of the Average Cost (AC) curve is known as:
(1) Equilibrium point
(2) Break Even Point (BEP)
(3) Point of inflexion
(4) Optimum point
Answer:
(4) Optimum point
II. Fill in the Blanks (1 Mark)
Question 1.
The cost incurred by producing an additional unit of output is …………….. .
Answer:
Marginal cost
Question 2.
The Long-run Average Cost (LAC) curve is also called as …………….. .
Answer:
Envelope curve
Question 3.
The shape of average fixed cost curve is …………….. .
Answer:
Rectangular hyperbola
Question 4.
When the average cost is at its minimum, then the marginal cost is ……………… .
Answer:
Equal to average cost
Question 5.
When the average revenue decreases, then the marginal revenue is …………… .
Answer:
Less than average revenue
III. Answer the following questions in one word. (1 Mark)
Question 1.
Mr. Sreenu is working as a manager in his own factory. Which concept of cost covers the salary of Mr. Sreenu ?
Answer:
Implicit cost
Question 2.
The Average Cost (AC) minus Average Fixed Cost (AFC) is equals to:
Answer:
Average Variable Cost (AVC)
Question 3.
If after selling 10 units the total revenue is Rs. 10,000/- and after selling 12 units the total revenue increases to Rs. 15,000/- then marginal revenue is:
Answer:
Rs. 2,500/-
Question 4.
The Average Revenue (\(\frac{TR}{Q}\)) is always equals to :
Answer:
Price
Question 5.
The mathematical relation between cost of a product and the various determinants of cost is known as:
Answer:
Cost function
IV. Briefly explain the following concepts in two to three sentences. (2 Marks)
Question 1.
Explicit cost
Answer:
The remuneration paid to outside factors of production is called explicit costs. They involve cash payments and are recorded in the books of accounts. Explicit costs are also called “Accounting costs”. E.g.: Wages to the labourers, rent for the factory building, payments for raw materials, etc. Both economists and accountants take them into account.
Question 2.
Implicit cost
Answer:
The cost of factors owned by the entrepreneur himself and employed in his own business is called implicit costs. Those factors are not paid. No monetary transaction takes place in their case. But they are economic costs and they take into account the amount these factors would have earned if thefy were used elsewhere or by another firm. Implicit costs are also called as “Imputed costs”. E.g.: Rent of own factory building, interest on own money capital investment. Economists take into account implicit costs also while accountants ignore them, because no monetary transactions takes place.
Question 3.
Opportunity cost
Answer:
Opportunity Cost is the cost of next best alternative, sacrificed in order to obtain that commodity. It is a loss of income due to opportunity foregone. Opportunity cost is also called ‘alternative cost’. It arises because of scarcity and alternatives uses of resources.
Question 4.
Enveloping curve
Answer:
The long run average cost curve (LAC) is a smooth curve enveloping all short-run average cost curves (SACs). The LAC is drawn as tangent to each of the SACSs. The long run average cost curve (LAC) is called ‘planning curve’, ‘boat shaped curve’ and ‘envelope curve’. The LAC is a “U” shaped curve.
Question 5.
Diagram showing AC and MC
Answer:
Question 6.
Horizontal Revenue curve
Answer:
Horizontal revenue curve, is characteristic of a perfectly competitive market In this scenario, a firm can sell any quantity of its product at the market price, which means the price per unit remains constant regardless of how much is sold.
There is no change in price in this market. When there is no change in price, average revenue remains the same. Marginal revenue is equal to the average revenue. Since, AR = MR it is the same curve which are horizontal and parallel to OX-axis.
Question 7.
Sloping AR, MR curves
Answer:
AR and MR are both negative sloped (downward sloping) curves. Both AR and MR decrease as output increases. As the price falls, average revenue and marginal revenue decrease. Hence, the AR and MR curves slope downwards and MR curve lies below the AR curve.
Question 8.
The following table shows the total revenue and total cost schedules of a competitive firm.
Calculate the profit at each level of output.
Answer:
Question 9.
From the following details, find out the Average Variable Cost of 10 units
| Output (Units) | 0 | 5 | 10 | 15 |
| Total Cost (in Rs.) | 100 | 200 | 400 | 600 |
Answer:
Fixed cost = 100
Variable cost = Total cost – Fixed cost
At 10 units, total cost = 400
Thus, variable cost = 400 – 100 = 300
Average variable cost = \(\frac{TVC}{Q}\) = \(\frac{300}{10}\) = 30
Question 10.
What is the Average total cost in producing 20 units ? If fixed cost is Rs. 1000/ and average variable cost is Rs. 2 ?
Answer:
Given,
AVC = 2
Fixed cost = 1000
No. of units = 20
TVC = AVC × Q
TVC = 2 × 20
TVC = 40
TC = TVC + Fixed cost
TC = 40 + 1000
TC = 1040
ATC = TC ÷ Q
= 1040 ÷ 20
ATC = 520
V. Write the answers briefly for the following questions. (4 Marks)
Question 1.
Briefly explain the various concepts of costs.
Answer:
(a) Explicit Costs: The remuneration paid to outside factors of production is called explicit costs. They involve cash payments and are recorded in the books of accounts. Explicit costs are also called “Accounting costs”.
E.g.: Wages to the labourers, rent for the factory building, payments for raw materials, etc. Both economists and accountants take them into account.
(b) Implicit costs: The cost of factors owned by the entrepreneur himself and employed in his own business is called implicit costs. Those factors are not paid. No monetary transaction takes place in their case. But they are economic costs and they take into account the amount these factors would have earned if they were used elsewhere or by another firm. Thus, the imputed earnings of factors, belonging to the organiser are called implicit i.e., self-owned and self-employed resources. Implicit costs are also called as “Imputed costs”. E.g.: Rent of own factory building, interest on own money capital investment.
(c) Opportunity Cost: Opportunity Cost is the cost of next best alternative, sacrificed in order to obtain that commodity. It is a loss of income due to opportunity foregone. Opportunity cost is also called ‘alternative cost’. It arises because of scarcity and alternatives uses of resources.
(d) Money Cost and Real Cost: The money outlays of a firm in the process of production of its output, in terms of money are called money costs. These are wages and salaries paid to labour, expenditure on machinery, payment for materials, power, light, fuel and transportation. On the other hand, pains and sacrifices of labour the real costs are regarded as real cost. Money costs do not include them. It is difficult to measure these costs.
(e) Short-run costs and Long-run costs: Costs are divided into two categories namely, short-run costs and long-run costs. Short-run costs refer to costs relating to the short period of time. In the short period, some factors of production are fixed.
E.g.: capital equipment, machinery and management, etc. Long run costs are costs relating to the long period of time. In the long-run, there are no fixed factors. All factors of production are considered variable hence, all costs are variable in the long-run.
Question 2.
Explain the relationship between Average cost (AC) and Marginal Cost (MC) with the help of a diagram.
Answer:
Relationship between AC and MC:
a) When AC is falling MC lies below the AC i. e., MC is less than AC (MC < AC). MC may be falling or rising in this condition. b) When AC is minimum (constant) at point ‘E’, MC is equal to AC (MC = AC). This point called optimum point and OQ output is optimum output. c) When AC is rising beyond OQ level of output, MC is also rises and becomes greater than AC (MC > AC).
Question 3.
What is Revenue ? Explain the different types of Revenues.
Answer:
The amount of money that the producer receives in exchange for the goods is called producer’s receipts or revenue. In other words, the total sale proceeds of a firm is known as revenue.
There are three types of revenue : total revenue, average revenue and marginal revenue.
1) Total Revenue (TR): Total amount of money or income received by the firm from the sale of a certain quantity of output is called total revenue. It is obtained by multiplying the price of a commodity by the number of units sold, i.e.,
TR = P × Q
Where, P = Price of the good, Q = the quantity of the good sold.
2) Average Revenue (AR) : Average revenue or receipts is the revenue per unit of the good sold. It is computed by dividing the total revenue by the number of units of a good sold.
Thus, AR = \(\frac{\text { Total Revenue }}{\text { Quantity sold }}\) = \(\frac{TR}{Q}\) = \(\frac{P×Q}{Q}}\) = P
3) Marginal Revenue (MR) : It is the addition to the total revenue by selling one additional unit of the good i.e., the revenue which would be earned by selling an additional unit of the good.
Marginal revenue can be expressed as,
MR = \(\frac{\text { Change in Total Revenue ATR }}{\text { Change in Quantity AQ }}\) = \(\frac{\Delta TR}{\Delta Q}\)
Question 4.
Explain the Revenue curves in imperfect competition.
Answer:
Revenue Curves in Imperfect Competition:
In Imperfect competition, the number of sellers for the product is limited. Price of the product is determined by the seller and he will be able to sell more at a lower price and less at a higher price, since the demand curve is a downward sloping curve.
The table and diagram reveals that as price falls, sales may improve and total revenue also increases gradually. Hence, the TR curve initially increases, reaches its maximum at a certain level of output and then falls after reaching its maximum. So that the shape of TR curve takes an “inverted U” shape. On the other hand, as the price falls, average revenue and marginal revenue decrease. Hence, the AR and MR curves slope downwards and MR curve lies below the AR curve. It is to be noted that MR can be zero or even negative, but AR cannot be zero:
Relationship between TR and MR:
1. When TR increases MR falls.
2. When TR reaches its maximum (or) remains constant, MR becomes zero (The slope of TR = 0).
3. When TR decreases, MR becomes negative.
Relationship between AR and MR:
1. Both AR and MR decrease as output increases.
2. MR lies below the AR.
3. MR can be zero or even negative, but AR cannot be zero as AR = price and price cannot be zero.
Question 5.
The following table shows the total cost schedule of a firm. Calculate the TFC, TVC, ahd AVC schedules of the firm.
Answer:
Question 6.
Compute the Total Revenue, Average Revenue and Marginal Revenue schedules in the following table. Market price of each unit of the good is Rs. 10/-.
Answer:
Question 7.
The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm ? Calculate the TVC, AFC, AVC, AC and MC schedules of the firm.
Answer
Question 8.
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. S. Find the AVC, AFC, AC and MC schedules of the firm for the corresponding values of output.
| Q | TC |
| 1 | 50 |
| 2 | 65 |
| 3 | 75 |
| 4 | 95 |
| 5 | 130 |
| 6 | 185 |
Answer:
VI. Write an essay on the following questions. (8 Marks)
Question 1.
Explain the different short run cost structure of a firm.
Answer:
Short-run costs refer to costs relating to the short period of time. In the short period, some factors of production are fixed. E.g.: capital equipment, machinery and management, etc.
The short-run costs are divided into fixed costs and variable costs.
A. Fixed costs: These are costs incurred to pay for fixed inputs. They remain fixed whatever is the quantity of output. They are to be incurred even if there is no production as long as the firm is not closed. These are also called supplementary costs. E.g.: Cost of machinery, rent for buildings, etc.
B. Variable costs: These are the costs that change with the changes in the quantity of output. There will be no variable costs if there is no production. These costs are also knows as prime costs. E.g.: Expenditure on raw material, wages to labourers, electricity charges, etc.
Short-run Total Costs:
(a) Total Fixed Costs (TFC): The total expenditure that a firm incurs to employ fixed inputs is called the total fixed cost. Whatever amount of output the firm produces, this cost remains fixed for the firm.
(b) Total Variable Costs (TVC) The total expenditure that a firm incurs to employ the variable inputs is called the total variable cost.
(c) Total Cost (TC): Total cost is the sum of total fixed costs and total variable cost i.e.,
TC = TVC + TFC
Short run Average Costs (SAC):
(a) Average Fixed Costs (AFC) : Average fixed cost is the fixed cost per unit of output. Average fixed cost gradually decreases, with an increase in the size of the output.
AFC = TFC/Q
(b) Average Variable Cost (AVC): Average variable cost is the variable cost per unit of output. We can calculate the average variable cost by dividing the total variable cost with the output produced i.e.,-
AVC = TVC/Q
(c) Short run Average Cost (AC): Average cost (AC) is the total cost per unit of output.
AC = TC/Q
This is also called Average Total Cost.
AC or ATC = AFC + AVC
(d) Short run Marginal Cost (MC): Marginal cost is defined as the change in total cost resulting from a one unit of change in output (incremental change).
MC = \(\frac{\text { Change in total cost }}{\text { Change in output }}\) = ∆TC/∆Q (Or) MCn = TCn – TCn-1
Question 2.
Compare the relationship between AR and MR under perfect competition and imperfect competition.
Answer:
Revenue Curves in Perfect Competition: A perfectly competitive market is one in which there is a large number of buyers and sellers of a homogenous product.
In the diagrams and table when there is no change in price, average revenue remains the same. Marginal revenue is equal to the average revenue. Since, AR = MR it is the same curve which are horizontal and parallel to OX-axis. The AR curve is called Demand curve.
Relationship between AR and MR:
1. AR = MR
2. AR and MR Curve are horizontal and parallel to OX-axis.
Revenue Curves in Imperfect Competition:
In Imperfect competition, the number of sellers for the product is limited. Price of the product is determined by the seller and he will be able to sell more at a lower price and less at a higher price, since the demand curve is a downward sloping curve.
The table and diagram reveals that as, the price falls, average revenue and marginal revenue decrease. Hence, the AR and MR curves slope downwards and MR curve lies below the AR curve. It is to be noted that MR can be zero or even negative, but AR cannot be zero.
Relationship between AR and MR:
1. Both AR and MR decrease as output increases.
2. MR lies below the AR.
3. MR can be zero or even negative, but AR cannot be zero as AR = price and price cannot be zero.
Question 3.
Discuss the Long-run cost curves with a suitable diagram.
Answer:
Long run costs are costs relating to the long period of time. In the long-run, there are no fixed factors. All factors of production are considered variable hence, all costs are variable in the long-run.
In the long run, all inputs are variable. There are no fixed costs. The total cost and the total variable cost therefore, coincide in the long run. Long run average cost (LRAC) is defined as cost per unit of output, i.e.,
LRAC = \(\frac{TC}{Q}\)
Long run marginal cost (LRMC) is the change in total cost per unit of change in output.
LRMC = (TC at q1 units) – (TC at q1 – 1 units)
Long run marginal cost curve:
- For the first unit of output, both LRMC and LRAC are the same.
- Then, as output increases, LRAC initially falls, and then, after a certain ppint, it rises.
- As long as average cost is filing, marginal cost must be less than the average cost.
- When the average costis rising, marginal cost must be greater than the average cost.
- LRMC curve is a ‘U’-shaped curve.
- It cuts the LRAC curve from below at the minimum point of the LRAC.
Long-run average cost curve:
- The long run average cost curve (LAC) is a smooth curve enveloping all short- run average cost curves (SACs).
- The LAC is drawn as tangent to each of the SACSs. The long run average cost curve (LAC) is called ‘planning curve’, ‘boat shaped curve’ and ‘envelope curve’.
- Whereas, the short-run average cost curves (SACs) are called ‘plant curves’.
- When LAC is declining, it is tangent to the falling portions of SACs and when LAC is rising, it is tangent to the rising portions of SACs.
- Hence, the LAC is a “U” shaped curve.
