Cost and Revenue — Important Questions

Fixed cost remains the same even when output is zero

Step 1: Recall the definition of Fixed Cost – it is expenditure on fixed factors of production that does NOT change with the level of output. Step 2: The critical feature is that fixed cost must be paid EVEN if output is zero. For example, if a farmer rents land for Rs. 5,000, he must pay that rent whether he grows a crop or not. Step 3: Why not option B? Fixed cost does NOT change with output – it is constant, not proportional. Step 4: Why not option C? This is a common misconception. Fixed cost is NEVER zero just because production stops. The commitment to pay rent, interest on loans, etc. c

AC = Rs. 100; MC = Rs. 85

Step 1: Calculate AC at 20 shirts: AC = TC / Output = 2000 / 20 = Rs. 100 per shirt. Step 2: Calculate MC of 21st shirt: MC = TC(21) – TC(20) = 2085 – 2000 = Rs. 85. Step 3: Notice that MC (Rs. 85) is LESS than AC (Rs. 100). This means the new unit cost less than the average – this will pull the average down. Step 4: Why not option B? AC at 20 shirts = 2000/20 = 100, NOT 99.28. The value 99.28 would be AC at 21 shirts (2085/21 ≈ 99.28), which was not asked. Step 5: Why not option C? MC ≠ AC unless a specific condition holds. Here the 21st shirt added only Rs. 85, not Rs. 100. Key Distinction:

AR = MR = Rs. 50 at all levels of output

Step 1: Recall AR = TR/Q = (P × Q)/Q = P. So AR always equals price. Here AR = Rs. 50 always. Step 2: When price is CONSTANT for all quantities, each additional unit sold adds exactly Rs. 50 to TR. So MR = Rs. 50 as well. Step 3: Verify with numbers: TR at 20 kg = 50×20 = 1000; TR at 21 kg = 50×21 = 1050. MR = 1050–1000 = Rs. 50 = AR. Step 4: Why not option B? MR does NOT increase here because price is fixed. MR = price = Rs. 50 constantly. Step 5: Why not option C? MR > AR only happens in unusual markets. When price is constant, MR = AR. Key Rule: AR = MR ONLY when the seller sells all units

Fixed cost, because it is tied to a fixed factor and is a contractual obligation

Step 1: Factory building is a FIXED factor of production – it does not change with output level in the short run. Step 2: Rent for a fixed factor = Fixed Cost. It stays the same regardless of how much (or how little) is produced. Step 3: It does not change at zero production because it is a contractual obligation – the producer must pay rent as agreed, whether or not production happens. Step 4: Why not Variable Cost? Variable costs change with output. Rent for a factory does not change whether you produce 100 units or 0 units. Step 5: Why not Implicit Cost? Implicit cost is for SELF-OWNED fact