UNIT – III PART – A

1. Define economics of scale. (APRIL 2012)

An economy of scale is an economics term that describes a competitive advantage that large
entities have over smaller entities. It means that the larger the business, non-profit or
government, the lower its costs. For example, the cost of producing one unit is less when
many units are produced at once.
2. Define fixed and variable costs. (APRIL 2012)
Fixed cost: Some inputs are used over a period of time for producing more than one batch of
goods. The costs incurred in these are called fixed cost. For example amount spent on
purchase of equipment, machinery, land and building.
Variable cost: When output has increased the firm spends more on these items. For example
the money spent on labour wages, raw material and electricity usage. Variable costs vary
according to the output. In the long run all costs become variable.
3. What is meant by real cost of production? (APRIL 2012)
Business decisions are generally taken based on the monetary values of inputs and outputs.
Note that the quantity of inputs multiplied by their respective unit prices will give the cost of
production.
4. What is optimisation? ( APRIL 2013)
An optimisation technique is generally defined as the technique used in finding the value of
the independent variable(s) that maximises or minimises the value of the dependent variable.
5. What is law of variable proportion? ( APRIL 2013)(APRIL 2016)
In the long run all input factors are variable. The producer can appoint more workers,
purchase more machines and use more raw materials. Initially output per worker will increase
up to an extent. This is known as the Law of Diminishing Returns or the Law of Variable
Proportion. To understand the law of diminishing returns it is essential to know the basic
concepts of production.
6. Define sunk costs. ( APRIL 2013) (NOV 2013)
Sunk costs are expenditures that have been made in the past or be paid in the future a part of
contractual agreement of previous decision. For example, the money already paid for
machinery, equipment, inventory and future rental payment on a warehouse that must be paid
a part of a long term lease agreement are Sunk costs. In general, Sunk costs are not relevant
to economic decisions. Sometimes the Sunk costs are also called a non-avoidable or non-
escapable costs.
7. What is production function? (APRIL 2015) (APRIL 2017)
The relationship between the amount of resources employed and total product or output is
called production function.
When the production function is expressed as an equation it shall be as follows:
Q = f (Ld, L, K, M, T )
It can be expressed as Q = f1, f2, f3, f4, f5 > 0
8. What is out lay cost? (APRIL 2015)
Any concrete business expenses that can be identified in the past, present or future.Outlay
costs are easy to recognize and measure because they have actually been incurred. For
corporations, outlay costs for new projects include start-up, production and hiring costs. ...
Also referred to as "explicit costs."
9. Define Historical cost. (APRIL 2015) (NOV 2016)
The price paid for a plant originally at the time of purchase. historical cost refers to the cost
an asset acquired in the past.
10. What is incremental cost? (APRIL 2016)
Incremental cost: Is the addition to costs resulting from a change in the nature of level of
business activity. Change in cost caused by a given managerial decision.
Incremental costs also arise as a result of change in product line, addition or introduction of a
new product, replacement of worn out plant and machinery, replacement of old technique of
production with a new one, and the like.

11. What are short run cost? (APRIL 2017)

Short-Run Costs are costs which change as desired output changes, size of the firm remaining
constant. These costs are often referred to as variable costs.
12. State the law of return to scale(APRIL 2017)
The law of returns to scale explains the proportional change in output with respect to
proportional change in inputs.
In other words, the law of returns to scale states when there are a proportionate change in the
amounts of inputs, the behavior of output also changes.

13. What is opportunity cost? (NOV 2012)

Opportunity cost is the value of a resource in its next best use. It‘s the cost for the next best
alternative use. The opportunity cost is really meaningful in the decision making process. For
example, consider a firm that owns a building and the firm do not pay rent for its use. If the
building was rented to others, the firm could have earned rent. The foregone rent is an
opportunity cost of utilizing the office space and should be included as part of the cost of
business. Sometimes this opportunity cost, are called as alternative cost.
14. Define shutdown cost. (NOV 2012)
Cost incurred if the firm temporarily stops its operation. These can be saved by
continuing business.
15. How do you determine optimum output level? (NOV 2014)
The marginal cost of production can be tracked to show the optimal production level where
per-unit production cost is lowest and therefore profit margin is the highest. The marginal
cost of production is the difference in total and per-unit average costs of production that
results from producing one additional product unit.
16. Define capital. (NOV 2014)
Capital is one of the basic factors of production along with land and labor. It is the
accumulated assets of a business that can be used to generate income for the business. Capital
includes all goods that are made or created by humans and used for producing goods or
services. Capital can include physical assets, such as a production plant, or financial assets,
such as an investment portfolio. Some treat the knowledge, skills and abilities that employees
contribute to the generation of income as human capital.
17. How do you calculate markup on cost? (NOV 2014)
Markup is when a company produces or purchases a good at one price and then sells the good
for a higher price. By having markup on goods, a company is able to earn profits.
1. Determine the markup the company wants and the cost of the good. In the example, the
cost is $5 and the markup rate is 10 percent.
2. Subtract 1 from the markup rate. In the example, 1 minus 10 percent equals 90 percent or
0.9.
3. Divide the cost of the product by the number calculated in Step 2. In the example, $5
divided by 0.9 equals $5.56. So if the company uses a 10 percent markup, it will sell the
product for $5.56.
18. What do you mean by profits in economic sense? (NOV 2014)
An economic profit or loss is the difference between the revenue received from the sale of an
output and the opportunity cost of the inputs used. In calculating economic profit,
opportunity costs are deducted from revenues earned.
19. What are complementary goods? (NOV 2015)
 Complementary good means a product that is interrelated with another product and
can be used with or accompanying another product.
Example:
Cars and Petrol, Shoes and Polish, Samosa and Potato, Computer Hardware and Computer
Software, Printer and Ink Cartridges, Torch and Battery, Pencils and Erasers, Gaming Portals
and DVD of Games.
20. What is Average fixed cost? (NOV 2015)
Total fixed cost divided by the level of output.
21. What do you meant by marginal cost? (NOV 2015)
Cost of producing an extra unit of output. Marginal Cost (MC) is the addition to total cost on
account of producing one additional unit of a product. It is the cost of the marginal unit
produced. Marginal cost of output can be computed as TCn – TCn-1, where n represents the
current number of units produced, and n-1 represents the previous number of units produced.
MC can also be computed by the following relationship:
MC = Change in TC = ΔTC
Change in Q ΔQ
22. What is past cost? (NOV 2016)
A past cost is money that has already been spent. These funds cannot be recovered, so the
related cost is irrelevant for decision-making purposes. A past cost is also known as a
sunk cost.