72 Workbook of Introductory Microeconomics

7.01 THINK FAST

Hurry Up!
Hurry! In Ten or fewer words, what is cost?
UP.

7.02
CATEGORIZATION
S0-50 Chance
Below is a list of examples related to concepts of
cost. Determine whether each example s
related toExplicitCost (EXPLICI
choices. orimplicit Cost IMPLICIl). Circle your answer

1.
EXPLICIT IMPLICIT Payment for raw material
2
EXPLICIT IMPLICIT Rent of own building
3. EXPLICIT IMPLICIT Interest on capital
4.
EXPLICIT IMPLICIT
5.
Depreciation of capital equipments
EXPLICIT IMPLICIT
Wages paid to the labour
6. EXPLICIT IMPLICIT Expenses on advertisements
7. EXPLICIT IMPLICIT Interest on own capital
8. EXPLICIT IMPLICIT Rent of the factory building
9. EXPLICIT IMPLICIT
Salary for producer's own services as managa
10. EXPLICIT IMPLICIT
Expenses on transportation
 Chapter-7 | Theory of Cost and Cost Curve 73
743 CATEGORIZATION
All Together Now
Decide whether cach of the following example is related to ixed Cost (FIXED) or
\ariable Cost (VARIABLE) . Then circle the appropriate choice.

FIXED VARIABLE Rent for the factory building.

FIXED VARLABLE Expenses on raw material
3 FLXED VARIABLE Wages of casual labour
4 FLXED VARIABLE Insurance premium
FLXED VARIABLE Power and fuel expenses
FIXED VARIABLE License fee

FLXED VARIABLE Commission on sales

FLXED VARIABLE Interest on capital

FLXED VARIABLE Depreciation
10. FLXED VARIABLE Salaries of permanent employees
. FLXED VARIABLE Expenses on advertisements

12 FLXED VARIABLE Normal profit

74 CATEGORIZATION

Set a good Example

or Real Cost
Determine whether each cost listed below is related to VMoney Cost (M)
(R). Circle your answer choices.

Sacrifice 2. R Wages
3 4. R Interest
Inconvenience
6 M R Discomfort
Rent
8. R Depreciation
Insurance Premium
9 R Efforts
10.
Waiting
 Microeconomics
Workbook of Introductory

7.05 MATCHING

It's Better than Clashing

Match the number of cach term in the column on the let to the best descriti
column on the right. Write your answers in the blanks provided.

1. Explicit Costs (a) Expenses incurred on fixcd factors of productkm

2. Total Cost (b) Per unit fixcd cost of production.

3. Variable Costs (c) Efforts, sacrifices, inconveniences involved in uppling

factors of production.
4. Average Total Cost (d) The minimum amount which is required to keep
producer in the production.
5. Implicit Costs (e) Addition to total cost as one more unit of output a
produced.
6. Long-Run Costs () Cost of production incurred by an individual firm.
7. Social Cost (8) Expenditure incorrect on inputs to produce acommodity
8 Average Fixed Cost (h) Per unit cost of the variable factors of production.
9. Normal Profit (i) Actual payments made by the firm for purchas1ng
hiring inputs.
10. Fixed Costs () There are no fixed cost curves.
11. Private Cost (k) Expenses incurred on variable factors of producton.
12. Real Cost () Costs of self-owned resources of producer.
13. Average Variable Cost (m) Sum of total fixed cost and total variable cos.
14. Cost (n) Per unit cost of production.
bearon
15. Marginal Cost hasto
(o) Cost or that the society
disadvantages
account of the production.
7.06 MATCHING
Be Resourceful
From the set of statements given in olmn Imatch
the altermative given in olumn Ik

Column l

1. Total Fixed Cost (a) Per unit cOst of prduetion

2. Total Variable Cost (b) Sum of total fixed coxt and otal vainbte oxt

3. Total Cost (c) Per unit variable ONt of podction

4. Average Fixed Cost (d) Change in total cost by odeíng one toe
unit of output
5. Average Variable Cost (e) Cost does not change with the change in
level of output
6. Average Total Cost () Per unit fixed cost of pmatetion
7. Marginal Cost (g) Changes directly with the level of pt

7.07 MATCHING
Mind Stretch
From the set of statements given in olumn 1
match the alternative given in Column k
Column I Column 1

1 TFC Curve a Starts from the origin

2 AFC Curve (b) Vertical summation of AFC and AVC

3. TC Curve (c) Cuts AVC curve at its miniímum point

4 TVC Curve (d) Vertical distance between ATC And AFC
AVC Curve (c) Roctangular hyperbela curve
6 ATC Curve () Straight line parallel to horizontal axín
7. MC Curve (g) Vertical Nummation of TFC and TVC
 Workhd of tntnsatory Mienexonomes

708 MATCHING
Got a Lght
From the set of tems given in Column I natch
the altemative given inColumn II .

Columnl Column ll
Explicit Cost (a) Amount spent in terms of money for the
and sale of a commodity production
Implieit Cost (b) Expenses incurred on fixed factorsof production
Money Cost (C)
Inconveniences in supplying the factors of
production.
4
Social Cost
(d) Expenses incurred on variable factors of production.
Fixed Cost
(e) Payment made to the factors of production in the
form of factor prices.
Variable Cost (0)
Disadvantages
the society.
of the production activity bear by
7, Real Cost
(g) Payment for self-owned resources.
7.09
FILL-IN
Formula Crunch
Convert cach formula below by filling the blanks.

TC TFC +
2. ATC
AFC +
3. AFC TFC +
4. AVC
ATC
+Q
+Q 6. TVC TC -
7. MC ATC +
8 TFC TC -
9 MC ATVC +
10. EMC
11 AFC ATC 12. AVC ATC
13. TC
xQ 14. TFC
15. TVC
 Chapter-7 |Theory of Cost and Cost Curve

7.10 COMPARISON
One of these things is not like the others.
In this exercise, you will see different groups of itens that are somehow related. In cach
group, one item does not belong to other items of the group. Jdentify the odd one and
cross them out. Then explain how the remaining items are related.

Explicit Cost Explanation

Absolute Cost

Actual Cost

Imputed Cost
2 Implicit Cost Explanation
Outlay Cost
Imputed Cost
Cost of self employed resources
3 Fixed Cost Explanatson
Supplementary Cost
Overbead Cost

Avoidable Cost

4. Unavoidable Cost Explanation

Prime Cost

Variable Cost

Direct Cost

Downward Sloping Curve Txplanation

AFC Curve

Rectangular Hyperbola
Can become Zero
 Workbook of Introductory Micnveconomics

7.11 FILL-IN
Correct Words

Complete cach statement given below with correet answer.

1. refers to cost which rises or falls as output changes.

(Fixed Variable)
cost are also known as supplementary costs of production.
3. The vertical summation of average fixed cost and average variable cost gives the
(FixedVariable)
curve.
(Average Cost/Marginal Cost)
4. Marginal cost is independent of (Fixed Cost/Variable Cost)
When AC falls, MC is than AC. (Higher/Lower)
6. Area under MC curve is cqual to
(TCATVC)
7 MC curve cuts and AC curves at their minimum point. (AVCIAFC)
8. The curve is downward sloping. (ATC/AFC)
9. The sum of MCs cqual the
(TCITVC)
10. In the there are only variable costs.
(Short-RunLong-Run)
11. is the cost of producing an extra unit. (ACIMC)
12. The rcason behind the U-shape of the MC curve is the law of
returns.
(Diminishing/Increasing)
13. Fixed costs are present only in the (Short-Run/Long-Run)
14. At the zero level of output total cost is equal to (TVCATFC)
15. is the addition to both the TVC un the TC, (ACMC)

712 FILL-IN
Missing Words
Think carefully about the most appropriate word or words
to complete the given statements.
1. costs are also known as absolute costs.
2. Normal profit is an example of cOst.

3. cost is known as prime cost of production.

4 When output is zero, the variuble cost will be
Per unit fixed cost is known as
 hapier h y o Cost and (ost (urve

protuctOD.
S mmum is khwwn as opomum level of

shap.
In tt nneTu. the m
rre uS he ure arr r cure at ther mnimum ponts.

TRIEOR FLSE
The Trth s out There

Deurmi w r ìstaemet beiw s For iru statemçnts, crele

As qupur s mei tr Atereme beween AIC nd AVC talls and ultumately

11
12

13
14 Fuxed s et o t srtun ttot tt the lkng-rn
 Workk of lntroductory Microcconomics

714 FILL-IN

Bank On It
UNe the terms in the Word Bank to fill in the blanks in cach statement given beB.

Word Bank
Increases Constant Rate Increasing Rate Horizontal
Negative Decreasing Rate Infinity Constant
Falls Above Minimum Positive
Maximum Lower Zero Vertical
When IC inereases at an increasing rate,
MC
2 When TVC increases at a rate, MC falls.
3 When MC is than the AVC, the AVC rises.
When MC becomes equal to AC, the AC
reaches at its
When MC is lower than AC, the AC
6. When MC rises, TVC increases
at
7 When MC is
than AVC, the AVC falls.
8, At
level of output TC = TFC.
9 TCcurve is the
summation of TFC and TVC curves.
10, AFC curve always remains

7.15 EXAM PRACTICE

On the Text

Consider multiple choice questions Calmly and

answer a, b, e, or dto each question. Logically. Choose and then mark you

All moncy costs can be regarded as:

(a) Social costs
(b) Opportunity costs
(c) Explicit costs
(d) Implicit costs
2. Fixed cost is known as :
(a) Special cost (b) Direct cost
(c) Prime cost
(d) Overhead cost
 Chapter7 | Theory of Cost and Cost Curve71
3 In a short period, when production inereases the AFC:
(a) Increases
(b) Decreases
(c) Remains constant (d) All of the above
4. Average fixed costs
(a) Remains the same whatever the level of output is:
(b) Increases as output increases
(C) Decreases as output increases
(d) Any of the above
5. Average costs curve contains in it :
(a) Normal profit (b) No normal profit
(c) Loss (d) All of the above
6. All of the following curves are U' shapcd except :
(a) The AFC curve (b) The AVC curve

(c) The MC curve (d) The ATCcurve

7. The costs that a firm incurs in purchasing any factor of production referred as :

(a) Explicit cost (b) Implicit cost

(c) Variable cost (d) All of the above
8. The MC curve intersects the AVC curve when AVC is :
(a) Minimum (b) Maximum

(c) Zero (d) Rising

9 When the output of a firm is increasing its total fixed cost :
(a) Increases (b) Decrcascs
(c) Remains constant (d) All of the above
10. Variable costs include costs of :

(a) Hiring the building for the factory (b) Purchasing heavy machine
(c) Paying the labourers (d) All of the above
11 Marginal cost is closely related to which of the followings :
(a) Fixed cost (b) Money cost
(c) Variable cost (d) Opportunity cost
12. Which of the following statements is correct:
TC= TFC -TVC (b) TC TVC TFC
(a)
(d) TVCTFC- TC
(c) TFC =TC - TVC
of uteu)
13 A firms average fixcd cOst is 30 at 4 units of output. What will it be at 6 unit
(b) ?30
(a) 20
(d) 60
(c) 40
SX Workbook of ntroductory Microeconomics
14. A firms average cost is 300 at 5 unit of output are R 320 at 6 units of output.
The marginal cost of producing the 6h unit of output is ?
(a) 720 (b) 320
(c) 420 (d) ?20
15. Identify the fixed cost from the following :
(a) Cost of raw materials
(b) Wages to labour
(c) Salary of watchman
(d) Electricity bill
The average fixed cost at 4 units of output is
20. Average variable cost at 5 units of
output is 40. Average cost of producing 5 units is :
(a)20
(b) 40
(c) ?56
(d) 60
17. From the following identify the
correct pair:
(a) Explicit Costs
() Imputed Costs
(b) Implicit Costs
(i) Absolute Costs
(c) Fixed Costs
(iii) Overhcad Costs
(d) Variable Costs
18.
(iv) Supplementary Costs
From the following identify the correct pair:
(a) AFC TFC
(i)
(b) AVC Q
(ii) TVC -TFC
(c) MC AQ
(ii)
(d) TVC ATVC
(iv) TC + TFC
19. From the following identify the
incorrect pair:
(a) Wages Paid to the Labour
(i) Explicit Cost
(b) Salary for the Services of
Entrepreneur (ii) Explicit Cost
(c) Rent of Own Building
(ii) Implicit Cost
(d) Normal Profit
20.
(ív) Implicit Cost
From the following identify the
incorrect pair:
(a) Rent for the Factory
Building (Þ) Fixed Cost
(b) Purchase of Raw Material
(ii) Variable Cost
(c) Power and Fuel Expenses
(ii) Supplementary
(d) Wages of Casual Labour
(iv) Prime Cost
 Caapicr-7 Theany of Cos and Cos Cunve713

21 From the llkowing identity the iNIeA pes

(a) AFC TRC

(b) AVC ATC - AFC

4TFC
(e) MC

TVC
(d) AVC

22. Fros the following identify the iNTUA per

(a) ATC U Shap
(b) AC Retanguar Hyperbaia
(c) AVC () DoW DWad Sioping
(d) MC ) U Shape
23 Frorm the following ientity the icTct per
(a) Area Under MC () TVC

(b) MC =AC () Minimurn Point of AC

(c) Maxinun MP ( ) Minimutn MC

Maximm MC ()Maximum MP
(d)
24. Read the following tatererts ctly a caose tae ooarret ahernative from the
follerwing
Staternem I In the sot rn e e r fod oosts and varabie costs.

In he kong r , ere ae y vanabie costs.

Statenent 2

(b) Both the stateets ae false

(d) Statenat 2 is true d satae is faise

caoose the correct ahernative fom the
235. Read the lollwing tdeEts caety and
fotkowine
Statenen | - The MC, AFC and AVC cunes
are generalBy U-shaped

Statenent 2 The ATCorve is doweard sioping

(b) Bh the stateets e ase

714 Workbook of Introductory Microcconomics

26. Read the following statements carefully and choose the correct alternative from the
following:
Statement I The MC curve cuts the AVC curve at its minimnum
point.
Statement 2 The MC curve cuts the AC curve at its minimum point.
(a) Both the statements are true
(b) Both the statements are false
(c) Statement 1 is true and statement 2 is false
(d) Statement 2 is true and statement 1 is
false
27. Read the following statements carefully and choose the
correct alternative from the
following:
Statement 1 - Total Cost is the horizontal sum of total
fixed cost and total variable
Cost.
Statement 2 The average fixed cost curve is a
(a) Both the statements are true
rectangular hyperbola.
(b) Both the statements are false
(c) Statement 1 is true and statement 2 is false
(d) Statement 2 is true and statement 1 is false
28. Read the following statements carefully and
choose the correct alternative from the
following:
Statement 1 - As long as MC is falling, AVC must be less
than MC.
Statement 2 - As AVC rises, MCmust be greater than
AVC.
(a) Both the statements are true
(b) Both the statements are false
(c) Statement 1 is true and statement 2 is false
(d) Statement 2 is true and statement 1 is false
29. Read the following statements carefully and
choose the correct alternative from the
following:
Statement 1 The level of output at which the AC is
minimum is known as optimum
level of production.
Statement 2 The minimum point on AVCcurve lies to the right of the
point on ATC curve. minimum
(a) Both the statements are true
(b) Both the statements are false
(c) Statement 1is true and statement 2 is false
(d) Statement 2 is true and statement | is false
 Chapter-7| Theory of Cost and Cost Curve15

30. Rcad the lollowing Ntatements carcfully and choosc the correct alternative from the
following
Statement I Fixcd cost iN also known as supplenentary cost of production.
Statement 2 Variable cost is avoidable cost of production.
(a) Both the statements are truc
(b) Both the stautements are falsc
(c) Statement | is true and statement 2 is false
(d) Statement 2 is true and statement I is false

7.16 APPLYING KEY CONCEPIS

Numerical Crunch.
By using appropriate method solve the following numericals.

The following table shows the total cost schedule of a fim. What is the total fixed schedule of this
firm? Calculate the TVC, AFC, AC and MC schedules of the firm.

Output (Units) 0 3 4 6

TC () 10 30 45 S5 70 90 120

Solution

2 Suppose that TFC is 120, find out (i) TC and TVC (ii) MC from the following data:

1 2 3 4 5
Output (Units)
160 140 160 180
ATC(E) 240

Solution