Q.1 Which of the following is considered a fixed cost?
Raw materials
Wages of temporary workers
Rent of factory building
Electricity charges for production
Explanation - Fixed costs are expenses that do not change with the level of output. Rent remains constant regardless of production.
Correct answer is: Rent of factory building
Q.2 Variable costs change when:
Output changes
Price level changes
Government policies change
Interest rates change
Explanation - Variable costs vary directly with the level of output produced, such as raw materials or direct labor.
Correct answer is: Output changes
Q.3 The total cost is the sum of:
Fixed cost and variable cost
Variable cost and marginal cost
Average cost and fixed cost
Marginal cost and average cost
Explanation - Total cost (TC) = Fixed Cost (FC) + Variable Cost (VC).
Correct answer is: Fixed cost and variable cost
Q.4 Which cost is incurred when producing one more unit of output?
Average cost
Total cost
Marginal cost
Fixed cost
Explanation - Marginal cost is the additional cost of producing one extra unit of output.
Correct answer is: Marginal cost
Q.5 When average fixed cost decreases, average total cost will:
Increase
Decrease
Remain constant
Become negative
Explanation - Average total cost (ATC) = AFC + AVC. When AFC falls, ATC decreases.
Correct answer is: Decrease
Q.6 Which of the following is NOT a component of cost?
Opportunity cost
Explicit cost
Sunk cost
Market price
Explanation - Market price is the selling price of output, not a component of production cost.
Correct answer is: Market price
Q.7 The U-shaped curve in cost analysis typically represents:
Fixed cost
Average variable cost
Marginal revenue
Total revenue
Explanation - The AVC curve is U-shaped due to initially increasing returns and then diminishing returns to variable inputs.
Correct answer is: Average variable cost
Q.8 Economies of scale result in:
Rising average cost
Falling average cost
Constant average cost
Negative marginal cost
Explanation - Economies of scale reduce average costs as production increases.
Correct answer is: Falling average cost
Q.9 Sunk costs are:
Recoverable if production stops
Already incurred and irreversible
Directly proportional to output
Variable with production level
Explanation - Sunk costs cannot be recovered and should not affect future production decisions.
Correct answer is: Already incurred and irreversible
Q.10 Average cost is calculated as:
Total cost ÷ Quantity
Fixed cost ÷ Quantity
Variable cost ÷ Quantity
Marginal cost ÷ Quantity
Explanation - Average cost (AC) is the total cost per unit of output produced.
Correct answer is: Total cost ÷ Quantity
Q.11 Which of the following is a semi-variable cost?
Salary of permanent staff
Electricity bill with basic charge plus usage charge
Cost of raw materials
Depreciation of machinery
Explanation - Semi-variable costs have both fixed and variable components.
Correct answer is: Electricity bill with basic charge plus usage charge
Q.12 If marginal cost is less than average cost, average cost will:
Increase
Decrease
Remain constant
Be zero
Explanation - When MC < AC, producing additional units pulls the average cost down.
Correct answer is: Decrease
Q.13 Which cost concept considers the value of the next best alternative forgone?
Accounting cost
Opportunity cost
Fixed cost
Variable cost
Explanation - Opportunity cost reflects the benefit lost when one alternative is chosen over another.
Correct answer is: Opportunity cost
Q.14 Total variable cost will be zero when:
Production is zero
Fixed cost is zero
Average cost is zero
Marginal cost is zero
Explanation - Variable costs depend on output. If nothing is produced, variable costs are zero.
Correct answer is: Production is zero
Q.15 The difference between total cost and total variable cost is:
Marginal cost
Fixed cost
Average cost
Opportunity cost
Explanation - Total cost = Fixed cost + Variable cost. So, TC - TVC = FC.
Correct answer is: Fixed cost
Q.16 Which of the following statements is true?
Average cost always equals marginal cost
Fixed cost changes with output
Marginal cost intersects average cost at minimum point
Variable cost is constant
Explanation - MC curve intersects the AC curve at AC's minimum, reflecting cost behavior.
Correct answer is: Marginal cost intersects average cost at minimum point
Q.17 If average fixed cost decreases, what happens to total fixed cost?
Increases
Decreases
Remains constant
Becomes negative
Explanation - AFC = FC/Q. Decreasing AFC is due to higher output, not a change in FC.
Correct answer is: Remains constant
Q.18 Which cost concept is most useful for managerial decision-making?
Sunk cost
Opportunity cost
Accounting cost
Historical cost
Explanation - Managers use opportunity cost to assess the real economic cost of decisions.
Correct answer is: Opportunity cost
Q.19 The cost of hiring additional labor when output is already high is usually:
Decreasing due to economies of scale
Increasing due to diminishing returns
Constant
Zero
Explanation - Beyond a certain point, adding more input yields less additional output, raising marginal cost.
Correct answer is: Increasing due to diminishing returns
Q.20 Which curve shows total cost at different output levels?
Average cost curve
Marginal cost curve
Total cost curve
Fixed cost curve
Explanation - The TC curve plots total cost against varying levels of output.
Correct answer is: Total cost curve
Q.21 In the short run, which cost is unavoidable?
Variable cost
Fixed cost
Marginal cost
Average variable cost
Explanation - Fixed costs must be paid even if production is zero in the short run.
Correct answer is: Fixed cost
Q.22 The sum of average variable cost and average fixed cost gives:
Marginal cost
Average total cost
Total cost
Total variable cost
Explanation - ATC = AVC + AFC by definition.
Correct answer is: Average total cost
Q.23 Costs that vary in proportion to output are called:
Fixed costs
Step costs
Variable costs
Sunk costs
Explanation - Variable costs change directly with output levels, like raw materials.
Correct answer is: Variable costs
Q.24 Which cost curve always declines as output increases?
Average fixed cost
Average variable cost
Marginal cost
Average total cost
Explanation - AFC = FC/Q. As output rises, AFC decreases continuously.
Correct answer is: Average fixed cost
Q.25 Marginal cost is minimum when:
Average total cost is minimum
Average fixed cost is minimum
Average variable cost is minimum
Total cost is maximum
Explanation - MC intersects AVC at AVC's minimum point, reflecting cost efficiency in short-run production.
Correct answer is: Average variable cost is minimum