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Deciphering the Economics

Here are 50 non-repetitive multiple-choice questions (MCQs) with answers on the topic of “Cost”. For CUET, CBSE board, IB Board, AP economics, IGCSE

1. What does the term “opportunity cost” refer to in economics?

• a) The explicit monetary cost of a good or service.
• b) The cost of the next best alternative foregone when a choice is made.
• c) The total expenses incurred by a business.
• d) The fixed costs of production.

Answer: b) The cost of the next best alternative is foregone when a choice is made.

2. Which of the following is an example of a variable cost for a manufacturing company?

• a) Rent for factory space.
• b) Depreciation on machinery.
• c) Cost of raw materials.
• d) Salaries of permanent employees.

Answer: c) Cost of raw materials.

3. What type of cost remains constant on a per-unit basis as the level of production changes?

• a) Fixed cost.
• b) Marginal cost.
• c) Variable cost.
• d) Average cost.

4. In economics, the long-run average cost curve shows the relationship between:

• a) Total cost and total output in the short run.
• b) Total cost and total output in the long run.
• c) Average cost and total output in the short run.
• d) Average cost and total output in the long run.

Answer: d) Average cost and total output in the long run.

5. Which of the following best describes economies of scale?

• a) When the average cost of production increases as output increases.
• b) When the average cost of production remains constant as output increases.
• c) When the average cost of production decreases as output increases.
• d) When the total cost of production decreases as output decreases.

Answer: c) When the average cost of production decreases as output increases.

6. What is the formula for calculating total cost?

• a) Total Cost = Fixed Cost + Variable Cost.
• b) Total Cost = Average Cost x Quantity Produced.
• c) Total Cost = Marginal Cost / Quantity Produced.
• d) Total Cost = Opportunity Cost x Quantity Produced.

Answer: a) Total Cost = Fixed Cost + Variable Cost.

7. In the short run, which cost can be altered or adjusted by a firm?

• a) Fixed cost.
• b) Marginal cost.
• c) Variable cost.
• d) Average cost.

8. Which of the following is an example of a sunk cost?

• a) The cost of purchasing new machinery.
• b) The cost of hiring additional employees.
• c) The cost of research and development for a new product.
• d) The cost of a non-refundable deposit on a lease.

Answer: d) The cost of a non-refundable deposit on a lease.

9. Which of the following is NOT a characteristic of a perfectly competitive market?

• a) Many buyers and sellers.
• b) Homogeneous or identical products.
• c) Limited barriers to entry.
• d) Significant control over market price by individual firms.

Answer: d) Significant control over market price by individual firms.

10. Which cost is relevant for short-term decision-making?

• a) Sunk cost.
• b) Average cost.
• c) Opportunity cost.
• d) Marginal cost.

11. In the long run, a firm should shut down if:

• a) Total revenue is less than total cost.
• b) Total revenue is greater than average total cost.
• c) Total revenue is less than the average variable cost.
• d) Total revenue is greater than marginal cost.

Answer: a) Total revenue is less than total cost.

12. What is the relationship between marginal cost (MC) and average total cost (ATC) when MC is below ATC?

• a) MC is rising, and ATC is falling.
• b) MC is falling, and ATC is rising.
• c) MC is equal to ATC.
• d) MC has no relationship with ATC.

Answer: b) MC is falling, and ATC is rising.

13. The minimum point on the average variable cost (AVC) curve corresponds to:

• a) The shutdown point.
• b) The profit-maximizing level of output.
• c) The point of diminishing returns.
• d) The break-even point.

14. What is the relationship between total cost and total variable cost?

• a) Total cost is always equal to total variable cost.
• b) Total cost is greater than total variable cost.
• c) Total cost is less than total variable cost.
• d) Total cost and total variable cost are unrelated.

Answer: b) Total cost is greater than total variable cost.

15. When marginal cost is below average variable cost, what is happening to average variable cost?

• a) It is rising.
• b) It is falling.
• c) It is constant.
• d) It is equal to marginal cost.

16. Which of the following best describes a normal profit in economics?

• a) Earning no profit.
• b) Earning a profit that covers both explicit and implicit costs.
• c) Earning a profit that covers only explicit costs.
• d) Earning a profit that exceeds the opportunity cost of capital.

Answer: b) Earning a profit that covers both explicit and implicit costs.

17. Which cost is associated with the use of a firm’s own resources, such as owner’s time and capital?

• a) Explicit cost.
• b) Accounting cost.
• c) Implicit cost.
• d) Opportunity cost.

18. Which of the following is an example of a fixed cost for a restaurant?

• a) Cost of ingredients.
• b) Monthly rent for the building.
• c) Hourly wages of servers.
• d) Electricity bill.

Answer: b) Monthly rent for the building.

19. What does the term “marginal cost” represent?

• a) The total cost of producing one additional unit.
• b) The cost incurred when producing the first unit.
• c) The average cost of all units produced.
• d) The total variable cost of production.

20. Which of the following statements is true regarding a natural monopoly?

• a) It is characterized by many firms competing in the market.
• b) It is often regulated by government authorities.
• c) It typically leads to lower prices for consumers.
• d) It results in perfect competition.

Answer: b) It is often regulated by government authorities.

21. In a perfectly competitive market, what is the shape of the demand curve for an individual firm?

• a) Horizontal (perfectly elastic).
• b) Upward-sloping.
• c) Downward-sloping.
• d) Vertical (perfectly inelastic).

22. If a firm’s marginal cost is greater than its marginal revenue, what should the firm do to maximize profit?

• a) Increase production.
• b) Decrease production.
• c) Keep production unchanged.
• d) Shut down in the short run.

23. Which of the following is an example of a short-run cost?

• a) Rent on a long-term lease.
• b) The cost of hiring temporary workers.
• c) The purchase of a new factory.
• d) The cost of raw materials for a year.

Answer: b) The cost of hiring temporary workers.

24. What is the relationship between average variable cost (AVC) and marginal cost (MC) when AVC is at its minimum point?

• a) AVC is rising, and MC is falling.
• b) AVC is falling, and MC is rising.
• c) AVC is equal to MC.
• d) AVC has no relationship with MC.

Answer: c) AVC is equal to MC.

25. In the long run, a perfectly competitive firm will produce at the level where:

• a) Marginal cost equals marginal revenue.
• b) Marginal cost equals average total cost.
• c) Average variable cost is minimized.
• d) Average total cost is maximized.

Answer: b) Marginal cost equals average total cost.

26. Which of the following is NOT a characteristic of monopolistic competition?

• a) Many buyers and sellers.
• b) Product differentiation.
• c) Perfect information.
• d) Low barriers to entry.

27. Which of the following is an example of an explicit cost for a business?

• a) The owner’s foregone salary.
• b) The cost of raw materials.
• c) The opportunity cost of using existing machinery.
• d) The interest on a business loan.

28. When a firm is producing at its shutdown point, what is its economic profit?

• a) Zero.
• b) Positive.
• c) Negative.
• d) Indeterminate.

29. Which of the following statements is true about a monopoly?

• a) It has many close substitutes for its product.
• b) It faces a perfectly elastic demand curve.
• c) It can earn economic profits in the long run.
• d) It is characterized by a large number of firms.

Answer: c) It can earn economic profits in the long run.

30. Which of the following is a characteristic of perfect competition?

• a) Product differentiation.
• b) Barriers to entry.
• c) A downward-sloping demand curve for the individual firm.
• d) A large number of sellers.

Answer: d) A large number of sellers.

31. In economics, the term “total cost” refers to:

• a) The cost of all resources used in production.
• b) The cost of producing one additional unit of output.
• c) The cost of fixed inputs.
• d) The total revenue earned by a firm.

Answer: a) The cost of all resources used in production.

32. In the long run, a perfectly competitive firm will:

• a) Produce where marginal cost equals average total cost.
• b) Produce where marginal cost equals marginal revenue.
• c) Produce where average variable cost equals marginal cost.
• d) Produce where average total cost is minimized.

Answer: d) Produce where average total cost is minimized.

33. What is the shape of the average total cost (ATC) curve when it is declining as output increases?

• a) U-shaped.
• b) Upward-sloping.
• c) Horizontal.
• d) Downward-sloping.

34. Which of the following is NOT considered a cost of production in economics?

• a) Explicit costs.
• b) Implicit costs.
• c) Economic costs.
• d) Accounting profits.

35. Which cost includes both explicit and implicit costs?

• a) Total cost.
• b) Accounting cost.
• c) Sunk cost.
• d) Variable cost.

36. When should a firm shut down in the short run?

• a) When total revenue is less than total cost.
• b) When total revenue is greater than the average total cost.
• c) When total revenue is less than the average variable cost.
• d) When total revenue is greater than marginal cost.

Answer: c) When total revenue is less than the average variable cost.

37. In a monopolistic market, which of the following is true?

• a) There are many firms selling identical products.
• b) There are significant barriers to entry.
• c) Firms are price takers.
• d) Firms earn zero economic profit in the long run.

Answer: b) There are significant barriers to entry.

38. What is the primary goal of a profit-maximizing firm in the short run?

• a) Maximizing total revenue.
• b) Maximizing market share.
• c) Maximizing economic profit.
• d) Minimizing production costs.

39. In the long run, what happens to a firm’s economic profit in perfect competition?

• a) It becomes zero.
• b) It becomes negative.
• c) It increases continuously.
• d) It remains constant.

40. Which of the following is a characteristic of a perfectly competitive market?

• a) Firms can set their own prices.
• b) There are significant barriers to entry.
• c) Products are differentiated.
• d) Firms are price takers.

Answer: d) Firms are price takers.

41. When does a firm in a perfectly competitive market maximize its profit?

• a) When marginal cost equals marginal revenue.
• b) When the average total cost is minimized.
• c) When total revenue exceeds the total cost.
• d) When price exceeds the average variable cost.

Answer: a) When marginal cost equals marginal revenue.

42. What is the primary difference between explicit and implicit costs?

• a) Explicit costs are opportunity costs, while implicit costs are out-of-pocket expenses.
• b) Explicit costs are incurred in the short run, while implicit costs are incurred in the long run.
• c) Explicit costs are variable costs, while implicit costs are fixed costs.
• d) Explicit costs are historical costs, while implicit costs are future costs.

Answer: a) Explicit costs are opportunity costs, while implicit costs are out-of-pocket expenses.

43. When marginal cost (MC) is less than average total cost (ATC), what is happening to ATC?

• a) It is rising.
• b) It is falling.
• c) It is constant.
• d) It is equal to MC.

44. What is the relationship between marginal cost (MC) and average total cost (ATC) when MC is above ATC?

• a) MC is rising, and ATC is falling.
• b) MC is falling, and ATC is rising.
• c) MC is equal to ATC.
• d) MC has no relationship with ATC.

Answer: a) MC is rising, and ATC is falling.

45. In a monopoly, what is the shape of the demand curve?

• a) Perfectly elastic (horizontal).
• b) Perfectly inelastic (vertical).
• c) Downward-sloping.
• d) Upward-sloping.

46. When is a firm operating at its production efficiency?

• a) When it produces at the minimum point of the average variable cost curve.
• b) When it produces at the minimum point of the average total cost curve.
• c) When it produces at the minimum point of the marginal cost curve.
• d) When it produces at the shutdown point.

Answer: b) When it produces at the minimum point of the average total cost curve.

47. What is the main characteristic of a natural monopoly?

• a) Many firms compete in the market.
• b) High barriers to entry.
• c) Perfect information.
• d) A downward-sloping demand curve.

Answer: b) High barriers to entry.

48. Which of the following is a characteristic of oligopoly?

• a) Many firms sell identical products.
• b) Firms are price takers.
• c) A small number of large firms dominate the market.
• d) No barriers to entry.

Answer: c) A small number of large firms dominate the market.

49. What is the relationship between average total cost (ATC) and marginal cost (MC) when ATC is at its minimum point?

• a) ATC is rising, and MC is falling.
• b) ATC is falling, and MC is rising.
• c) ATC is equal to MC.
• d) ATC has no relationship with MC.

Answer: c) ATC is equal to MC.

50. In economics, what is the primary function of profit?

• a) To cover explicit costs.
• b) To cover implicit costs.
• c) To ensure the long-term survival of the firm.
• d) To signal the efficient allocation of resources.

Answer: d) To signal the efficient allocation of resources.