Concept of Cost Function

1. Give two examples of Variable Cost. (Delhi 2013)

Ans. Two examples of Variable Cost are as follows:

1. Cost of raw material.
2. Wages of casual labour.

2. Give an example each of Fixed Cost and Variable Cost. (Delhi 2013)

Ans. Examples for Fixed Cost and Variable Cost are:

1. Fixed Cost Rent of the building.
2. Variable Cost of raw material.

1. Define Marginal (Delhi 2013,2010c, 2008,2007,2006; All India 2009,2006)

Ans. Marginal Cost is 'additional cost' owing to the production of an additional unit of output. Symbolically, <math>MC_{nth} = TC_n - TC_{n-1}</math>

1. Give two examples of Fixed Cost. (Delhi 2013; All India 2010)

Ans. Two examples of Fixed Cost are: ٠. 6

1. Expenditure on machine and plant.
2. Wages and salaries of permanent staff.

1. What is the behaviour of Average Fixed Cost as output increases? (hots; Delhi 2012) or

What is the behaviour of Average Fixed Cost as output is decreased? (HOTS; AH India 2009) or How does Average Fixed Cost behave as output is increased? (Delhi 2008C)

Ans. Average Fixed Cost goes on diminishing as output increases, but never become zero.

1. What is the behaviour of Total Variable Cost as output increases? (All India 2012)

Ans. Total Variable Cost increases with increase in output.

1. Define Fixed Cost. (Delhi 2009, 2008 C, 2007, 2006; All India 2009, 2006)

Ans. Fixed Costs are the sum total of expenditure incurred by the producer on the purchase or hiring of fixed factors of production.

8. Why is Average Total Cost greater than Average Variable Cost? (Alt India 2009)

Ans. Average Total Cost (ATC) is greater than Average Variable Cost (AVQ because Average Total Cost is the sum of Average Fixed Cost (AFC) and Average Variable Cost.

9. What does cost mean in economics? (Delhi2008, 2007)

Ans. Cost refers to the expenditure incurred by a producer on the factor as well as non- factor inputs for a given amount of output of a commodity

10. Define Variable Costs. (All India 2008; Delhi 2006)

Ans. Variable Costs are the costs incurred on hiring variable factors of production, these costs vary directly with the quantity of output produced. These are called prime cost also. Symbolically, TVC = TC -TFC

3 Marks Questions

11. State the relation between Total Cost and Marginal Cost. (Delhi 2014)

Ans. Relationship between Total Cost and Marginal Cost are:

1. When MC is diminishing, TC increases at a diminishing rate.
2. When MC is rising, TC increases at an increasing rate.
3. When MC is constant, TC increases at a constant rate.

12. What is the behaviour of Average Fixed Cost as output is increased? Why is it so? (Delhi 2014)

Ans. AFC falls, when output is increased. Since, the Total Fixed Cost remains the same with changes in output, therefore, AFC falls steadily with increase in output. AFC curve is downward sloping.