Production and Costs (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Production and Costs. Every question comes with the correct answer and an explanation.

Production and Costs (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Production and Costs. Every question comes with the correct answer and an explanation.

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TL;DR: Practise chapter-wise MCQs for Class 12 Economics — Production and Costs. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Economics — Production and Costs. Every question comes with the correct answer and an explanation.

Production and Costs MCQs with Answers & Explanations

Q1. Opportunity cost refers to:

  1. Explicit payments made by a firm
  2. The total cost of production
  3. The cost of the next best alternative foregone ✓ (correct)
  4. The sum of fixed and variable costs

Explanation: Opportunity cost is a fundamental concept in economics that represents the value of the next best alternative that must be given up to pursue a certain action. It's the cost of what you could have had instead.

Q2. If the Average Cost (AC) is falling, then Marginal Cost (MC) must be:

  1. Equal to AC
  2. Zero
  3. Greater than AC
  4. Less than AC ✓ (correct)

Explanation: When Average Cost is falling, it means that the cost of producing the last unit (MC) is lower than the average cost of previous units, pulling the average down. Therefore, MC < AC.

Q3. The Law of Diminishing Marginal Returns states that if one factor of production is increased while others are held constant, then the marginal product of that factor will eventually:

  1. Decrease ✓ (correct)
  2. Remain constant
  3. Become zero
  4. Increase

Explanation: The law of diminishing marginal returns is a fundamental concept in economics that describes the decrease in the marginal output of a production process as the amount of a single factor is incrementally increased, while the amounts of all other factors remain fixed.

Q4. Which of the following is an example of a variable cost in the short run?

  1. Salary of the factory manager
  2. Cost of raw materials ✓ (correct)
  3. Interest paid on a loan for machinery
  4. Rent of the factory premises

Explanation: Variable costs are costs that change with the level of output. The cost of raw materials directly depends on how much is produced.

Q5. When Total Product (TP) is at its maximum, Marginal Product (MP) is:

  1. Negative
  2. Positive and decreasing
  3. Zero ✓ (correct)
  4. Positive and increasing

Explanation: The Marginal Product curve intersects the Total Product curve at its maximum point. When TP is at its peak, MP is zero. Before that, MP is positive and decreasing.

Q6. If total output increases from 100 units to 120 units when a firm hires one more worker, the Marginal Product of that worker is:

  1. 220 units
  2. 100 units
  3. 120 units
  4. 20 units ✓ (correct)

Explanation: Marginal Product (MP) is the change in total output resulting from employing one more unit of a variable input. Here, change in output is 120 - 100 = 20 units.

Q7. In the long run, all costs are considered:

  1. Variable costs ✓ (correct)
  2. Implicit costs
  3. Sunk costs
  4. Fixed costs

Explanation: In the long run, a firm has the flexibility to adjust all its factors of production. Therefore, all costs become variable in the long run as they can be altered according to the desired scale of production.

Q8. Which cost curve is U-shaped?

  1. Average Fixed Cost (AFC)
  2. Both B and C ✓ (correct)
  3. Marginal Cost (MC)
  4. Average Variable Cost (AVC)

Explanation: Both Average Variable Cost (AVC) and Marginal Cost (MC) curves are typically U-shaped due to the law of diminishing marginal returns. AFC, however, continuously falls.

Q9. When does Average Fixed Cost (AFC) start to fall?

  1. When Total Cost starts to fall
  2. When Variable Cost starts to fall
  3. As output increases ✓ (correct)
  4. When Marginal Cost is at its minimum

Explanation: AFC is calculated as Total Fixed Cost (TFC) divided by output. Since TFC is constant, as output increases, AFC will continuously decrease.

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