Concepts Of Cost And Revenue — Practice Quiz

Rectangular hyperbola (continuously falling curve)

Step 1: AFC = TFC ÷ Q. Since TFC is constant, as Q increases, AFC keeps falling. Step 2: The product of AFC × Q always equals TFC (a constant). This is the mathematical definition of a rectangular hyperbola. Step 3: The AFC curve falls steeply at first and then gradually flattens but NEVER touches the X-axis (since AFC can never be zero). Step 4: U-shaped describes AVC, ATC, and MC curves — not AFC. Step 5: A horizontal line describes the TFC curve, not AFC. An upward sloping line does not describe any cost curve studied in this chapter.

When output is zero, variable costs are also zero

Step 1: Variable costs are incurred on variable factors like raw materials, temporary labour, fuel, etc. Step 2: If a firm produces zero output, it does not need to employ any variable factor. Step 3: Therefore, TVC = 0 when Q = 0. This is why the TVC curve starts from the origin (0,0). Step 4: This is different from TFC, which starts from above the origin (TFC is positive even at zero output). Step 5: Option A is wrong — variable and fixed costs are independent concepts. Option C describes fixed costs, not variable costs. Option D is wrong because at zero output, TC = TFC (not TFC = TVC).

TC of 5 units – TC of 4 units

Step 1: Marginal Cost is the additional (extra) cost of producing one more unit of output. Step 2: Formula: MC_n = TC_n – TC_(n-1), so MC of 5th unit = TC(5) – TC(4). Step 3: Alternatively, MC can also be calculated as TVC_n – TVC_(n-1) because TFC cancels out. Step 4: Option A (TC÷5) gives Average Cost, not Marginal Cost. Option C (TVC÷5) gives Average Variable Cost. Step 5: Option D is wrong because TFC never changes, so TFC(5) – TFC(4) = 0, not MC. MC has no relation with fixed costs.

MC < AC

Step 1: The relationship between MC and AC is similar to the relationship between a marginal value and an average value. Step 2: When a new (marginal) value is less than the average, it pulls the average down. Step 3: Therefore, when AC is falling, it means MC is below AC (MC < AC). Step 4: When AC is rising, MC > AC (MC is above and pulling AC up). When AC is at its minimum point, MC = AC (MC cuts AC from below at its lowest point). Step 5: This is a fundamental relationship — MC curve passes through the minimum point of the AC curve. Option A describes when AC is rising. Option B describes t