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CA Foundation Unit 3: Production, Cost & Perfect Competition — practice questions — page 2

Explore 52 free Unit 3: Production, Cost & Perfect Competition questions in CA Foundation Economics. Open each question or exercise to read its content, reference answers and available explanation.

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Unit 3: Production, Cost & Perfect Competition questions and exercises with answers

Showing questions 31–52 of 52.

Consider the cost data: Output (Q): 0, 1, 2, 3, 4, 5, 6 and Total Cost (₹): 240, 330, 410, 480, 540, 610, 690. What is the average fixed cost at 2 units of output?Read the answer and worked solution →Consider the cost data: Output (Q): 0, 1, 2, 3, 4, 5, 6 and Total Cost (₹): 240, 330, 410, 480, 540, 610, 690. What is the marginal cost of the 6th unit of output?Read the answer and worked solution →When average cost is falling as output rises, the relationship between marginal cost (MC) and average cost (AC) must be:Read the answer and worked solution →At the point where the average cost curve reaches its minimum, the marginal cost curve:Read the answer and worked solution →A firm's average total cost is ₹ 300 at 5 units of output and ₹ 320 at 6 units. The marginal cost of producing the 6th unit is:Read the answer and worked solution →A firm has a total variable cost of ₹ 1,000 at 5 units of output, and its fixed costs are ₹ 400. What is the average total cost at 5 units?Read the answer and worked solution →A firm's average fixed cost is ₹ 20 when it produces 6 units. What will its average fixed cost be at 4 units of output?Read the answer and worked solution →Which of the following correctly states the relationship among the average cost functions?Read the answer and worked solution →With which one of the following costs is the concept of marginal cost most closely related?Read the answer and worked solution →Which one of the following is an example of an explicit cost?Read the answer and worked solution →In the short run, as the output of a firm steadily increases, its average fixed cost (AFC):Read the answer and worked solution →Match each production term to its meaningRead the answer and worked solution →Short run or long run?Read the answer and worked solution →Sort the returns to scaleRead the answer and worked solution →True or false: productionRead the answer and worked solution →Which one does NOT belong?Read the answer and worked solution →Match each cost term to its meaningRead the answer and worked solution →Fixed cost or variable cost?Read the answer and worked solution →Key in the costRead the answer and worked solution →Which cost is higher?Read the answer and worked solution →Tap what stays fixed in the short runRead the answer and worked solution →True or false: costsRead the answer and worked solution →

Worked practice questions

Consider the cost data: Output (Q): 0, 1, 2, 3, 4, 5, 6 and Total Cost (₹): 240, 330, 410, 480, 540, 610, 690. What is the average fixed cost at 2 units of output?

  1. ₹ 120
  2. ₹ 80
  3. ₹ 85
  4. ₹ 205
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Correct answer: A. ₹ 120

1. Total fixed cost is the total cost at zero output, since no variable cost exists there: TFC = ₹ 240. 2. TFC stays constant at all output levels. 3. AFC at 2 units = TFC / Q = 240 / 2 = ₹ 120. 4. ₹ 205 (D) is ATC at 2 units (410/2), ₹ 85 (C) is AVC at 2 units ((410−240)/2), and ₹ 80 (B) is the marginal cost of the 2nd unit (410−330). Hence ₹ 120. _Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.18–19_

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Consider the cost data: Output (Q): 0, 1, 2, 3, 4, 5, 6 and Total Cost (₹): 240, 330, 410, 480, 540, 610, 690. What is the marginal cost of the 6th unit of output?

  1. ₹ 70
  2. ₹ 115
  3. ₹ 80
  4. ₹ 690
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Correct answer: C. ₹ 80

1. MC of the 6th unit = TC₆ − TC₅. 2. TC₆ = ₹ 690 and TC₅ = ₹ 610. 3. MC = 690 − 610 = ₹ 80. 4. ₹ 70 (A) is the MC of the 5th unit (610−540), ₹ 115 (B) is ATC at 6 units (690/6 = 115), and ₹ 690 (D) is total cost, not the increment. Hence ₹ 80. _Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.19_

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When average cost is falling as output rises, the relationship between marginal cost (MC) and average cost (AC) must be:

  1. MC is greater than AC
  2. MC is less than AC
  3. MC is equal to AC
  4. MC is equal to zero
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Correct answer: B. MC is less than AC

1. The marginal pulls the average: a marginal value below the average drags the average down. 2. Therefore when AC is falling, MC must lie below AC. 3. This is the standard marginal-average rule applied to costs. 4. MC > AC (A) would raise the average, MC = AC (C) holds only at AC's minimum, and MC = 0 (D) is unrelated. Hence MC is less than AC. _Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.7_

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