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Production and Costs (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.

Written & reviewed by the Syllab.in Academic Team (CBSE/NCERT subject experts) · Updated Aug 8, 2026

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

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. Zero
  2. Greater than AC
  3. Equal to 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. Increase
  3. Remain constant
  4. Become zero

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. Interest paid on a loan for machinery
  2. Cost of raw materials ✓ (correct)
  3. Salary of the factory manager
  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. Positive and increasing
  2. Positive and decreasing
  3. Zero ✓ (correct)
  4. Negative

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. 100 units
  2. 220 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. Fixed costs
  3. Sunk costs
  4. Implicit 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 Variable Cost (AVC)
  2. Both B and C ✓ (correct)
  3. Marginal Cost (MC)
  4. Average Fixed Cost (AFC)

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 Variable Cost starts to fall
  2. When Total 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.

Q10. Which of the following is NOT a short-run cost?

  1. Variable Cost
  2. Fixed Cost
  3. Rent of the factory building
  4. Total Cost ✓ (correct)

Explanation: Total cost is the sum of fixed and variable costs, and while it includes short-run elements, it's not a distinct short-run cost category in the same way fixed and variable costs are. Rent of the factory building is a fixed cost, which is a short-run cost.

More 12 Economics MCQs

  • Introduction to Microeconomics
  • Theory of Consumer Behaviour
  • The Theory of the Firm under Perfect Competition
  • Market Equilibrium
  • Non-competitive Markets
  • Introduction to Macroeconomics

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